Economy at its peak – time to lay the groundwork for future growth
Economic growth in Lithuania remains robust, while the labour market is tightening, especially in the country’s largest cities. Slowing exports are cooling the heated domestic market, however, it is crucial to start gearing up for future challenges and boosting growth potential to ensure strong momentum in the long term.
“Remaining on a strong footing, the Lithuanian economy has confidently entered the expansion phase. However, it will not sustain the current growth pace indefinitely, thus it is vital to make necessary preparations well in advance, given that signs of deceleration are already on the horizon,” said Gediminas Šimkus, Director of the Economics and Financial Stability Service at the Bank of Lithuania.
Lithuania’s GDP growth projection has been revised up by 0.2 percentage point for 2018 (to 3.4%) and 0.1 percentage point for 2019 (to 2.8%). Annual wage growth of more than 10% clearly reflects a tightening labour market, specifically in the country’s largest cities. The overall unemployment is projected to continue on its downward path, to stand at 6.3% in 2019. The unemployment rate in Vilnius, Kaunas and Klaipėda is already below 4%, in line with rates recorded last decade when the economic upswing reached its peak. With growth in wages outpacing that of labour productivity, Lithuanian exporters might find it increasingly difficult to compete in foreign markets.
Given the high degree of economic openness in Lithuania, its economic situation is heavily dependent on global conditions, especially in its key trading partner economies. The global growth outlook is, however, subdued: on the back of rising geopolitical tensions, tighter financing conditions, escalating trade wars and mounting uncertainty, economic expansion is expected to slow down. According to the latest projections, exports of Lithuanian goods and services will increase by 5.3% this year, nearly 3 times less than a year ago.
Having reached 3.7% in 2017, inflation should also weaken, to stand at 2.6% in 2018 and 2.2% in 2019. This year’s global commodity price developments have significantly lifted fuel prices, yet prices for food, beverages, industrial goods and services, which have been rising at a slower pace than last year, have somewhat eased headline inflation. With wages growing faster than prices, household purchasing power will continue to increase. However, in order to ensure its further rise, the domestic market needs to attract productivity-inducing investment.
“Lithuania’s economy is heating up and the tax changes that will come into force next year will exacerbate the situation. There is no need for additional stimulation; instead, we have to focus on laying a solid foundation for economic growth in the long run,” said Mr Šimkus.
In his view, there are three contributing factors that could boost Lithuania’s growth potential. First, more active labour market participation among older and younger population, lower emigration or higher remigration rates – all this could help ease labour shortages. Second, a well-developed infrastructure – economic and business conditions in the country should encourage corporate and foreign direct investment. Finally, transition to higher value added production through technology and skill upgrading.
The English version of the latest Lithuanian Economic Review will be available on the Bank of Lithuania website by the end of October 2018.