Salary indexation for early 2016

By Stephen Evans

Inflation will pick up towards the end of this year, leading to everyone probably receiving a 2.5 percent index-linked salary increase in early 2016, said the Luxembourg Central Bank in their latest quarterly bulletin.

However, they added that this depended to a large extent on oil prices, and so the index could come at the end of this year or towards mid-2016.

This puts them slightly at odds with Etienne Schneider, the economy minister, who last week reaffirmed his prediction for an increase by the end of this year.

The salary index kicks in after prices rise by 2.5 percent and the last across-the-board rise was in October 2013. However, since then inflation in this country has slowed as oil prices have fallen sharply and price rises have been low and sometimes negative throughout the eurozone.

Hence, the Central Bank predicts 0.6 percent inflation this year, the same rate as last year. Underlying inflation (excluding energy) is set to be 1.6 percent this year, up slightly on last year to a large extent due to the VAT increase on January 1.

So, if the oil price stops falling, overall inflation should start to pick up in the coming months, and is likely to be closer to 2 percent in 2016, the Central Bank said.

Resident employment growth

They also are cautiously optimistic that the rate of employment creation will rise slightly, reaching a robust 2.7 percent for the latter half of this year. 

The Central Bank points out that resident employment is now growing more quickly than before the 2008 crisis, even though the number of cross-border commuters is still increasing at a faster rate.

Most new jobs are in business services, the public sector and the broad sector “retail, transport and hospitality”. This suggests that the financial sector, in the widest sense, continues to perform well even if employment in the banking sector as a whole has changed little this year.

Public sector jobs still carry on being created, despite slower rates of state spending. The result is that people have more cash to spend in bars, shops and restaurants.

The number of people on state-run back to work schemes fell in August for only the second time since 2008.

Unemployment was 6.9 percent in August 2015, a comparatively low figure by European standards. However, by our calculations, if the 5,273 people on a government scheme are included, unemployment would be around 9 percent.

Ease of credit

Banks made it easier to take out loans in the second quarter, the report added. Conditions and costs are lower across the board mainly due to competitive pressure and lower perception of risk.

This is the sixth quarter in a row where a Central Bank survey has been conditions being eased. Overall, they estimate that the economy will grow by around 4 percent in the coming years, 2-3 times as much as the whole eurozone.

The Central Bank bases the estimation for 2015 on leading indicators of economic activity. Of course, this could all be blown off course by unforeseen events, or predicted events such as an interest rate rise in the USA.

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