2018-06-25
Stronger domestic and external demand continue to bolster economic activity, yet growing investment in production modernisation and capacity building helps to ease tensions in the economy. Amid labour shortages, the Bank of Lithuania has upgraded its wage growth forecast, while price growth is anticipated to be less pronounced.
“Demand for employees has outpaced the supply of job seekers, whereas the labour share is almost record-high. Economic growth in Lithuania has been above potential for some time, thus tensions in the labour market are mounting,” said Gediminas Šimkus, Director of the Economics and Financial Stability Service at the Bank of Lithuania.
The economy is projected to expand by 3.2% in 2018 and 2.7% in 2019, while the unemployment rate will moderate to 6.7% and 6.6% respectively. The forecast for wage growth in 2018 has been revised upwards – from 6.7% to 7.6%.
Given the decline in unemployment and the still high demand for workers, the domestic business sector may take one of the following routes to tackle labour shortages: increase wages, boost investment in production modernisation and development, or attract workers from third countries.
Statistics show that in the last few years wage growth has been broad-based across sectors. In 2017 the highest rise in worker pay was recorded in trade, agriculture, information and communication, construction and manufacturing, where wages increased by roughly 9–11%.
Since last year mounting tensions have been eased by recovering investment, which boosts production capacity. Part of investments, however, is directed towards construction, which, in turn, spurs demand for the already scarce labour force. With emigration leaving a noticeable gap in the labour market, the country tries to alleviate at least some shortages with third-country labour force.
“Immigration, however, only provides a temporary solution that does not address the problem at its root cause. We have to orient towards enhancing labour market relevance of higher education systems, boosting investment in technologies generating high value added, and easing social strains,” said Mr Šimkus.
In 2017 Lithuania saw an influx of several thousand immigrants, yet only a couple of hundred of them were skilled workers.
Price growth is projected to slow down
At the beginning of 2018, year on year, the rise in oil prices scaled down. However in May, due to pressure in the international environment, price growth rebounded, in turn bringing a jump in domestic petrol and diesel prices.
“Although the contribution of higher oil prices to price growth is greater than anticipated, we expect that it will be offset by less pronounced food price inflation and the waning impact of excise duties. As a result, prices will rise at a slower pace than last year,” said Mr Šimkus.
Compared to 2017, growth in prices of milk and dairy products has slowed by roughly 25%, the growth rate of meat prices has almost halved, while that of prices for food has reduced by nearly a sixth. More restrained increases in excise duties and somewhat weaker rise in prices of services will also put downward pressure on inflation.
According to Bank of Lithuania projections, average annual inflation is expected to fall from 3.7% in 2017 to 2.7% in 2018.