2017-09-20
Economic growth to accelerate, unemployment to fall, wage growth to outpace price increases
The Bank of Lithuania has increased its forecast for economic growth. As economic growth gains momentum, the labour market is increasingly under pressure, which entails robust wage growth. Inflation, too, will be higher this year, while next year it is likely to decrease quite significantly.
‘Economic growth has basically been driven by export related factors – stronger economic situation in foreign countries and more abundant investment. The accelerating pace of development may, however, be slowed down by labour shortages. Enterprises will be much affected by substantially growing labour costs; thus, in order to preserve and strengthen the positions they hold in foreign markets, they will have to increase labour productivity,’ says Raimondas Kuodis, Deputy Chair of the Board of the Bank of Lithuania.
Economics
The Bank of Lithuania has revised its 2017 forecast for the growth of the economy, the growth projection being 3.6 per cent (up from the previous forecast of 3.3%). The revision was prompted by an improvement in the economic development in both the euro area and other trade partners, e.g. commodity exporting countries. Export acceleration was not only due to foreign demand but a recovery in manufacturing investment as well. The strengthening transport sector and the construction sector, which started to recover, should also be mentioned.
Labour market
The Bank of Lithuania projects that this year unemployment in the country will fall to 7.3 per cent, whereas wages will rise 7.8 per cent. Labour shortages on the back of growing demand and unfavourable demographic trends let employees to negotiate higher wages and other conditions. It is namely the labour share that has been steadily expanding and is above its historical average for the third consecutive year – which signals labour market tensions. Next year unemployment is expected to decline to 7 per cent and wages to rise 5.9 per cent.
Inflation
This year inflation may stand at 3.4 per cent. At the beginning of the year it was driven by global oil price developments, entailing also fuel and food price increases. Later, domestic factors such as robust wage growth, alcohol and tobacco price increases on the back of raised excise duties contributed more substantially. It is projected that next year global oil prices will no longer rise, food prices will increase less, and it is not intended to raise excise duties to a substantial extent so far. Due to the above reasons, inflation in 2018 is expected to decline to 2.2 per cent.