explain why firms are still hiring even as growth slows, with permanent contracts accounting for the vast majority of the increase in employment this year. but clearly this could change if firms start to see the slowdown as more persistent. the third consideration is the still very favourable financing conditions in the euro area, underpinned by our accommodative monetary policy. the cost of bank borrowing for firms fell to record lows in the first half of this year across all large euro area economies, while the growth of loans to firms stood at its highest rate since 2012. the growth rate of loans to households is also the strongest since 2012, with consumer credit now acting as the most dynamic component, reflecting the ongoing strength of consumption. household net worth remains at solid levels on the back of rising house prices and is adding to continued consumption growth. but there are some risks to financing conditions as well. lack of fiscal consolidation in high - debt countries increases their vulnerability to shocks, whether those shocks are autonomously produced by questioning the rules of emu ’ s architecture, or are imported through financial contagion. so far, the rise in sovereign spreads has been mostly restricted to the first case and contagion across countries has been limited. such developments feed into tighter bank lending conditions for the real economy. to date, though some repricing in bank lending is happening where the rise in spreads has been more significant, overall bank funding costs remain near historical lows in all large countries, thanks to a steady deposit base. to protect their households and firms from rising interest rates, high - debt countries should not increase their debt even further and all countries should respect the rules of the union. other risks stem from the possibility of a disorderly increase in global risk premia. the reaction of asset prices to surprise inflation in other jurisdictions at a more advanced stage in the business cycle, a return to the financial deregulation that was the primary cause of the financial crisis, and fragilities in several emerging market economies exposed to currency mismatches, are all risks that warrant close monitoring. outlook for inflation and monetary policy so, how is the growth picture affecting the outlook for inflation? here we need to assess to what extent wage growth will be robust to slowing growth momentum, and to what extent wage increases will pass through to prices. the link between output growth and wage growth in the euro area has strengthened compared with recent years. as the domestic expansion continues, wage pressures have started to build and have surprised

on the upside this year. annual growth in compensation per employee reached 2. 3 % in the second quarter. this increase is broad - based and present across most sectors and euro area economies. two factors suggest wage growth should be resilient to a period of slower growth. 3 / 6 bis central bankers'speeches the first is that the labour market is already showing signs of tightness, and this should remain the case so long as growth continues at or above potential. labour shortages have become more prominent and widespread across the euro area. broader measures of slack – that include underemployed workers – have also fallen substantially, although there is still some heterogeneity across countries. the second factor is the changing composition of wage growth. the initial pick - up in wages from the trough in 2016 was driven by wage drift, which includes components such as bonuses and overtime and tends to react more quickly to the cycle. but more recently negotiated wages have strengthened, rising from the trough of 1. 4 % in mid - 2016 to 2. 2 % in the second quarter of 2018. negotiated wage agreements frequently last two or three years, suggesting that higher rates of wage growth are likely to persist. however, the next leg of the inflation process – the pass - through of wage growth to prices – remains relatively muted. measures of underlying inflation, such as core inflation, continue to hover around 1 % and have yet to show a convincing upward trend. to some extent, this lagged response is in line with the standard pattern of demand - driven expansions in the euro area. 4 as demand picks up, employment initially reacts slowly, which boosts overall productivity and lifts margins. firms therefore have little need to increase prices. but as the expansion matures, businesses increase wages more strongly to attract labour, and unit labour costs rise, squeezing margins and putting upward pressure on prices. this pattern has been visible in the euro area since the start of 2017. unit labour cost growth fell initially last year, but rose measurably this year to reach 1. 6 % in the second quarter, its strongest rate since the start of 2013. there is evidence that margins are now being squeezed, with unit profit growth decreasing substantially from 2. 7 % in the third quarter of 2017 to 0. 7 % in the second quarter of 2018. we should therefore expect price pressures in the euro area to mount. however, the speed of this process is state - dependent. preliminary ecb research finds that