2017-12-19
Bank of Lithuania projections: challenges in the labour market will constrain economic growth
The Bank of Lithuania has kept its economic projections unchanged – the domestic economy is forecast to expand by 3.6 per cent this year and by 2.8 per cent the next. The forecast for inflation has been revised upwards, to stand at 3.7 per cent in 2017 and 2.6 per cent in 2018. The Bank of Lithuania continues upgrading the unemployment rate forecast – this year the unemployment rate is projected to drop to 7.1 per cent, next year – to 6.8 per cent.
‘Export is once again the main driver of economic growth. 2017 will be one of the best years for Lithuanian exporters. Next year the pace of global trade expansion should moderate somewhat, consequently translating into less pronounced growth of exports. Economic growth might start losing steam as wages outpaced the country’s GDP and corporates are still facing a shortage of labour. The survey of enterprises shows that these challenges are partly offset by investment in production and development,’ said Gediminas Šimkus, Director of the Economics and Financial Stability Service at the Bank of Lithuania.
Export growth has reached its peak
The spike in global trade, which this year was the main driving force of Lithuania’s economic growth, is seen as extraordinary in particular as the growth in global trade volumes has well outpaced the growth of global GDP, reversing the trend from several previous years. This is also attributable to strengthening investments in various regions across the globe and the recovery of commodity-exporting countries that have benefited from the rise of commodity prices.
In the first half of 2017 exports of goods and services have hit the fastest pace of growth since 2013. Exports of goods of Lithuanian origin, excluding mineral products, have also accelerated. This stemmed from investment in production, transport vehicles, other machines and equipment, and intellectual property products. Manufacturing and transport sectors have stepped up such investment, increasing their competitive edge – this is why Lithuania’s tradable sector has been taking over the ever increasing share of external markets.
Challenges in the labour market
The participation rate has continued to increase to the advantage of the country’s labour market. Nonetheless wages are rising quicker than the country’s GDP, while corporates continue to face a shortage of labour, all of which dampen economic growth. In recent years, Lithuania’s working age population (aged 15 to 64) has been decreasing at an annual pace of 1.1 to 1.8 per cent, a trend that will show no signs of abating. According to a Bank of Lithuania survey, some businesses, especially small ones, reported that they can no longer raise wages, whereas increasingly more enterprises (especially industrial and construction enterprises) turn to foreign labour pools.
‘Acute structural problems have surfaced in the labour market. For example, more than 30 thousand jobless persons – or more than a fourth of all unemployed – are unqualified workers. We are also noticing a sharp divide in terms of unemployment rates between the smaller and the three largest regions,’ said Ernestas Virbickas, Head of the Macroeconomics and Forecasting Division at the Bank of Lithuania.
Price growth will be weaker
This year global prices for oil and food commodities have been a significant contributor to the rise in inflation. It has also been pushed up by significant increases in excise duties on alcoholic beverages and tobacco. The year 2017 has been marked by a surge in wages, bringing a rather significant upturn in prices for services. Next year, however, the international economic environment will be more favourable: prices for both oil and food commodities are expected to grow at a slower pace, which will put downward pressure on inflation.
The latest Lithuanian Economic Review and macroeconomic projections, revised and published on a quarterly basis, are available on the Bank of Lithuania website.
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