Bank of Lithuania: Despite weaker economic expansion, wage growth will continue to outpace inflation
In view of global and domestic economic trends, the Bank of Lithuania has downgraded its real GDP projection for 2018 from 3.4% to 3.2%. Lithuania’s growth projection for 2019 remains unchanged at 2.8%. Wage growth will continue to outpace inflation, while unemployment is projected to gradually decline.
“Boosted by wage increases in the private and public sector as well as higher minimum wage, private consumption will remain an important driver of economic growth. Given rising global headwinds, exports and investment are expected to decelerate,” said Gediminas Šimkus, Director of the Economics and Financial Stability Service of the Bank of Lithuania.
Skilled labour shortages continue to boost wages. Nonetheless, based on available data, firms have already accumulated large financial reserves, which means that they are free to choose how to expand their business – through wage increases or investment in other productivity-enhancing measures. According to the Bank of Lithuania projections, wage growth this year is expected to reach 9.5%, an upward revision of 0.8 percentage point compared to the October projection due to the stronger-than-expected actual growth. In 2019 wage growth should slightly moderate and stand at 6.9%.
Wages will continue to outpace inflation. The overall rise in prices will be underpinned by higher labour costs, which contributed the most to growth of service prices (they have accounted for almost a third of headline inflation for the second consecutive year). Commodity prices will also have a significant impact on inflation: even though recently global oil prices have substantially decreased, during the autumn months oil prices in euro were roughly a third higher on a year-on-year basis, putting upward pressure on consumer prices. At least for now, oil prices are projected to rise slower than this year, which will curb headline inflation. Uncertainty regarding food commodity prices is more elevated. Although the majority of them dropped in 2018, due to unfavourable weather conditions throughout the year food commodity prices may start to increase. For example, a notable rise has been already seen in vegetable prices, which was one of the main reasons why the inflation forecast for 2019 has been revised up from 2.2% to 2.4%.
Unemployment is projected to further decline to 6.3% in 2018 and 6.1% in 2019. The underlying demographic trends and the resultant labour market challenges are expected to prevail: the working-age population (15–64 years) will continue shrinking as older cohorts leave the workforce in higher numbers than younger cohorts enter it. This will be somewhat offset by a greater inflow of immigrants, who mainly come to Lithuania to work in the transportation or construction sector.
Due to weaker investment – a major contributor to global expansion in 2017 – global trade growth has slowed by almost a fifth compared to the previous year. More restrained market expectations on the back of escalating trade tensions and turmoil in some developing countries have weighed on trade growth in the euro area, CIS countries and developing countries in Asia and Latin America. Hence export projections have been revised down for both 2018 and 2019. It should be noted, however, that until now exports (especially exports of goods of Lithuanian origin) have been keeping pace with foreign demand. In other words, the foreign market share taken by Lithuania’s exporters has been gradually increasing, a trend that is likely to continue looking ahead.