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Latest projection of the Bank of Lithuania: Given economic acceleration, average wage will rise more than prices

March 16, 2017

Having assessed the gradual pick-up in domestic economic activity and the improving situation of Lithuanian manufacturers in relevant foreign markets, the Bank of Lithuania projects that this year the economy will expand by 2.6 per cent, while its growth rate next year will reach 2.8 per cent. Wage growth, estimated to stand at 6.1 per cent in 2017 and 5.7 per cent in 2018, will outstrip the rising inflation rates. Such projections for economic and wage growth are higher than expected and announced at the end of last year.

‘Larger labour income will translate into higher household consumption, which will be one of the factors behind economic expansion. However, consumption should not boost as much as in recent years, since prices are projected to continue their upward climb, whereas growth in labour income is expected to be less pronounced given no further growth in minimum wage’, said Ernestas Virbickas, Head of the Macroeconomics and Forecasting Division at the Bank of Lithuania.

He noted that last year the average wage showed the highest increase since the economic recovery after the global financial crisis, reaching 7.9 per cent. This was followed by an increase in minimum wage, yet wage developments were vigorous even having eliminated its effect. It is important to note that wages are rising more than labour productivity.

However, according to Mr Virbickas, problems in the labour market will weigh on the domestic economy, stimulated by increasing domestic demand, investment and more favourable conditions in export markets. Increasingly less young residents enter the labour market each year and a considerable number of persons are emigrating, which dampens the enterprise expansion outlook and continues to put further pressure on wage dynamics, elevating the need to find new solutions to enhance corporate competitiveness.

‘Due to higher oil prices, influencing prices for goods and services, the surge in inflation, expected this year, is seen to be short-term. We project that next year inflation rates will decline’, said Ieva Skačkauskaitė, Economist at the Macroeconomics and Forecasting Division.

According to her, for a long time, the decline in global oil prices was favourable to consumers, scaling down inflation. As the Organization of the Petroleum Exporting Countries (OPEC) undertook to curb oil extraction, energy resource prices rose, boosting consumer price levels, primarily fuel prices, in Lithuania as of November 2016.

A brief review of economic developments in the country and macroeconomic projections are published on a quarterly basis. They are available on the Bank of Lithuania website.