Euro zone: Profit margins cannot remain stable when core inflation falls

The consensus is that nominal per capita wages will rise by around 4% in 2024 in the euro zone; labour productivity declined by 1.6% from the third quarter of 2022 to the third quarter of 2023, so it is unlikely to rise in 2024, and this will lead to a rise in unit labour costs of at least 4% in 2024. For core inflation to be lower than 3% at the end of 2024, corporate profit margins will therefore have to fall sharply (if unit labour costs rise by 4%, which corresponds to the optimistic assumption of stable labour productivity, the ratio between the GDP deflator and unit labour costs will have to fall by 1%, while it fell by only 0. 7 % between the third quarter of 2022 and the third quarter of 2023, with zero GDP growth). In 2024, therefore, we cannot have both: A significant fall in inflation; And decent earnings growth. Either core inflation will remain fairly high (around 4%), and earnings can remain high, or inflation will fall sharply, and earnings will have to fall significantly.