According to the latest data released by the European Central Bank, labor productivity per capita in the Eurozone in Q2 decreased by 0.4% year-on-year. Before that, the labor productivity per capita in the first three months of 2024 decreased by 0.5% year-on-year, while the June forecast released by ECB researchers was a year-on-year decrease of 0.3%.

Although continuously improving labor productivity is crucial for Eurozone economic growth, it is also a key support for the European Central Bank to reach its target inflation rate of 2%. The inflation target is basically based on the overall slowdown in wage growth in the Eurozone, the part of the pay increase that company profits absorb, and the comprehensive basis for reducing the cost per unit output through productivity improvement.

There was almost no improvement in labor productivity in the previous quarter in the Eurozone.

Including ECB President Christine Lagarde, central bank officials have continuously emphasized the importance of the link between profits, corporate wages, and productivity in recent years. If significant and obvious improvement cannot be achieved, the process of inflation resistance and the continuous interest rate cut by the European Central Bank may be tricky.

Some analysts believe that the European Central Bank's goal may be that labor productivity per capita will increase by about 1% in 2025 and 2026, which is faster than the average 0.6% increase in labor productivity in the 20 years before the COVID-19 pandemic. However, analysts generally believe that this target view may be too optimistic, even after a June economic data forecast report hinted that growth may accelerate.

The new economic data may exacerbate the growing skepticism and trigger discussions about whether the ECB can further accelerate the reduction of borrowing costs.

According to macro research director Kasten Brejenski from ING, as productivity further declines, the risk of inflation remaining high for a longer period of time increases significantly.

Brejenski said: "At the next ECB monetary policy meeting in September, a new problem that rises slowly but definitely under the surface for the ECB is: how to smoothly implement the potential interest rate cut when your inflation forecast is revised upward again."

Brejenski said: "More generally, with the productivity data, the only reason for the interest rate cut is that the euro zone economy is getting weaker, not inflation relief."

In June of this year, ECB officials raised their expectations for inflation in 2024 and 2025, but made extensive predictions for lowering borrowing costs, sparking a debate about whether it is reasonable to continue to reduce interest rates according to the ECB's expectations.

Brejenski said: "More generally, with the productivity data, the only reason for the interest rate cut is that the euro zone economy is getting weaker, not inflation relief."

It is worth noting that there are more and more signs recently that the Eurozone economy is in a state of weakness. As signs related to economic downturns, such as the reduction of consumer spending, emerge, Eurozone companies slowed down their recruitment pace in the second quarter.

It is reported that after the latest revised statistical data shows a month-on-month increase of 0.3% before the third month, the number of employed people in the Eurozone in the second quarter after adjustment increased by only 0.2% month-on-month. In addition, due to the disappointing performance of the industry in June, the revised GDP of the euro area 20-country economic output-after deducting price changes and used to infer real purchasing power and economic growth-Only increased by 0.3% over the previous quarter, almost the same as the growth rate in the first quarter.

Pete Haynes Christiansen, an economist at Danske Bank, said that this new data from the Eurozone is indeed "worrisome".

He said: "The first key data of the European Central Bank's trigonometric survey data shows that productivity growth in the second quarter is inferior to the staff's forecast in June." "If the overall wage growth rate in the Eurozone does not slow down sufficiently, the European Central Bank may not get enough pleasing news to announce a rate cut again, which may make the important decision to maintain the benchmark interest rate in September."

The market has fully digested the expectation that the ECB will cut interest rates two more times this year, and believes that there is an 80% chance that the ECB will cut interest rates for the third time-even though the inflation rate in the Eurozone unexpectedly rose to 2.6% in July.

At the beginning of this year, due to workers' efforts to counter various impacts of inflation through actions such as strikes, workers' wages continued to rise at a relatively high rate. The European Central Bank will announce negotiation and negotiation wage data for the second quarter on August 22.