“The Lithuanian economy was well prepared for the period of difficulties. This was due to the low level of population and business indebtedness, the successful years of development following the pandemic, which helped economic participants to accumulate financial reserves, and the more abundant investments of the European Union’s structural funds that reached the Lithuanian economy in time.
For these reasons, even in the face of high interest rates and sluggish external demand, companies did not reduce production capacity or reduce the number of employees in order to be ready to respond flexibly and quickly to the recovery of export demand.
Consumers also weathered the inflationary shock without radical changes in consumption behavior. Accumulated financial reserves, growing incomes and responsible borrowing helped households successfully withstand the pressure of both inflation and high interest rates,” says Šiaulių bankas’ chief economist.
GDP growth will reach 2 percent this year, and will accelerate to 2.7 percent next year.
According to I. Genytė-Pikčienė, the strong start of the year shows the resilience of both companies and households, and as the year progresses, favorable circumstances for economic development will only increase.
Manufacturing production, which experienced a significant decline last year, is already showing more and more positive signs. The energy-intensive chemical industry has recovered, warehouses are being renovated, and the furniture and wood production branches are preparing for a new growth cycle.
Little by little, the expectations of industry representatives are also improving, the need for labor force is recovering, new stocks are being formed and preparations are being made for the recovery of export market demand.
“Disappeared inflation, dynamic labor market and rapid wage growth have already allowed purchasing power to recover. As a result, the growth of household consumption should soon accelerate, and as Europe gets lower interest rates, private investments will be more confident in autumn, and export growth will strengthen. For these reasons, Lithuania’s GDP growth will reach 2 percent this year, and next year it will accelerate to 2.7 percent,” predicts Indrė Genytė-Pikčienė, Chief Economist of Šiauliai bankas.
The labor market remains dynamic – according to the forecasts of Šiauliai bankas, the average unemployment rate will be 7.2 percent this year, and 6.5 percent next year.
Reviewing labor market trends, Šiaulių bankas economist draws attention to the significant influence of international migration. For the sixth year in a row, a positive balance of international migration can be observed. Due to the pandemic, political persecution in Belarus, and later due to the war in Ukraine, the net flow of international migration has been positive for the past five years and reached 169 thousand.
A turning point has also been reached in the international migration statistics of Lithuanian citizens – from 2020. more Lithuanian citizens return to Lithuania than leave. For this reason, during this period, the number of citizens in Lithuania increased by 28 thousand.
The Lithuanian economy successfully managed to absorb the increased supply of workers, the immigrant flows even helped to mask some long-term structural imbalances in the labor market.
“According to the data of the Employment Service, the number of registered unemployed per month in January-March remained stable and more or less corresponded to the five-year average. In addition, Lithuania has not seen such a high number of employed persons as observed in recent quarters since the time before 2009. The Great Recession,” I.Genytė-Pikčienė names the facts underlying the resilience of the labor market.
However, more passive demand from employers suggests that the labor market is experiencing a slower phase of the business cycle. From 2022 in September, new jobs were registered less than new unemployed, and in January-March, the average number of new jobs registered per month was 1.5 times lower than the five-year average.
Although the first half of this year is not easy for companies due to high interest rates, sluggish demand and the impact of the tide of inflation on earnings, wage growth remains strong.
The average gross salary will increase by 9.5 percent this year. per year, and in 2025 – 8.7 percent
“Wage growth this year is driven by last year’s decisions to raise the monthly minimum wage by ten percent from the beginning of the year and to improve the remuneration of public sector employees. This year is an election year, so it is likely that political decisions regarding income growth next year will be no less generous”, says I.Genytė-Pikčienė.
The economist notes that the discussions that have already started in the public space regarding the monthly minimum wage in 2025. seems ambitious.
“In the short term, such decisions look politically attractive. The increase in the monthly minimum wage will continue to accelerate wage growth and strengthen the purchasing power of households. However, the threats to competitiveness posed by rapidly rising labor costs should not be overlooked.
Although we are still well behind the euro area average in terms of average wages, the total wage bill to GDP ratio has been above it for some time. If wages grow much faster than labor productivity, it is not sustainable,” observes the Chief Economist of Šiaulių bankas.
Šiaulių bankas predicts that the average annual inflation will reach 0.9 percent this year, and will rise to 2.3 percent next year.
The high comparative base of the price index formed by the energy crisis and inflation shock results in extremely low annual inflation rates.
Energy and other goods have been expensive for some time, inflationary processes are supported only by rising prices of services. While salary growth does not lose momentum, service inflation remains relatively high, as labor costs make up a significant part of their pricing.
“Inflation will remain muted in the first half of the year, but it may pick up a little in the fall, when it is likely that the reduced interest rates will increase the development of the world’s industrial centers and the appetite for raw materials and will infuse optimism into the consumers of mature economies,” notes I.Genytė-Pikčienė.
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2024-05-12 01:18:21
