D. Imbrasas: Economic development is not likely to decelerate this year
According to the flash estimate of Statistics Lithuania, in the last quarter of 2016 the country’s real GDP grew by 2.7 per cent year on year. This year, economic development is not expected to decelerate. According to the Bank of Lithuania, in 2017, the economy will grow by 2.4 per cent. A recovery in the construction sector, which should be strengthened by a rebound in the flow of EU funds, and the gradually improving condition of major trade partners, will be the main drivers of stronger growth of the Lithuanian economy in 2017. However, there are downside risks surrounding economic development.
Comment by Darius Imbrasas, Senior Economist, Macroeconomics and Forecasting Division, Bank of Lithuania
At the end of 2016, economic development intensified, while the growth for the year as a whole – 2.3 per cent – was stronger than last year. In 2016, factors that do not depend on economic conjuncture, such as poor agricultural harvest due to worse weather conditions and temporary deceleration in the flow of EU funds at the juncture of two long-term financial perspectives prevented the Lithuanian economy from even stronger growth. About EUR 435 million less in EU funds were received over the first three quarters of 2016 (or 1.5% of GDP for the respective period) year on year.
Labour market development conducive to employees and moderate price growth provided favourable conditions for larger household consumption. It was a significant factor behind economic growth in 2016. The rate of growth of household expenditure for goods and services in 2016 was practically the highest since the beginning of economic recovery. Out of the labour market developments conducive to consumers, strong wage growth can be singled out. Wage growth was driven by the increasing shortage of labour and the rising minimum wage. Although strong increase of minimum monthly wage, which has determined quite a significant share of wage growth, thus far is not planned this year, the increasingly sensitive issue of the shortage of qualified staff will prevent wage growth from moderating significantly. However, in the near future, the opportunities to increase consumption even more may be less favourable, as the purchasing power of consumers is likely to be weakened by growing inflation: already at the end of 2016, annual price growth accelerated; even stronger price growth is projected for this year – it will be driven by future increases in global oil and food commodity prices.
One should note that signs of recovery in the construction sector emerged in the last quarter of the year. Surveys of business trends show an improvement in the assessment of the economic environment of construction enterprises – the volume of works of and new orders for construction enterprises started to increase, fewer and fewer enterprises indicate insufficient demand as the major factor hindering the development of their activities. Signs of growth in the volumes of work within the construction sector can also be observed in the Lithuanian industry. The volumes of domestic market sales of such industrial activities as cement production, metal production and production of metal constructions, manufacture of electric equipment – one of the largest customers of these activities is the construction sector – increased in the second half of 2016.
It should be noted that there is nevertheless the risk that the prospects for Lithuania’s tradable sector may be less favourable than currently expected. For some time already such a risk arises due to uncertainty surrounding global economic growth, especially growth in developing countries (primarily China). These countries are not necessarily important for Lithuanian exporters, but they may be important for Lithuania’s trade partners. Moreover, should the current trends in Lithuania’s labour market persist, the risk that the competitiveness of Lithuanian enterprises may deteriorate due to the impact of wage growth outpacing labour productivity growth would become increasingly important.