The Lithuanian EconomyMonthly newsletter from Swedbank’s Economic Research Departmentby Vaiva Šečkutė No. 6 • 5 September 2012 Prices, productivity, and wages will move in lockstep Gross wages increased more slowly in the second quarter of this year, when they were 2.2% higher than a year ago. Wages are likely to increase somewhat faster in the second half of this year. Wage growth will not create inflationary pressures as productivity growth is likely to remain faster. The main inflation driver this year is global commodity prices. However, weak domestic confidence and consumers’ cautiousness will deter businesses from increasing prices significantly. Businesses will be likely to compensate some of increasing costs from their own resources.Wage growth modest so far one of the countries that has succeeded in lowering its unit labour costs the most and has, therefore,Gross wage growth remains modest, and net real improved its cost competitiveness significantly.wage growth was still negative in the secondquarter this year, a trend that has been continuing We forecast that the internal devaluation will befor three-and-a-half years. Annual gross wage over this year and net real wages will increase bygrowth decelerated from 3.2% in the first quarter to 1.4%. Although we understand that there is a2.2% in the second this year. Quarterly growth, tangible downside risk to our forecast, upwardalso, amounted to only 0.7%. pressure on wages should be created by structural unemployment issues. Wages for skilled employeesWage and productivity growth should rise more significantly as they are in short 25% supply. Wages, however, will stagnate for low- skilled workers due to high unemployment and 20% uncertainty regarding the euro area economies, as 15% well as post-election decisions regarding the 10% minimum monthly wage. Economic sentiment 5% continued falling in August and was -4, compared with -2 in July and 0 in June. Overall confidence 0% was pushed down mostly by industry, which is -5% mostly directly dependent on developments in the -10% export markets. Industrial confidence decreased from -7 in July to -14 in August. Therefore, wage -15% growth is likely to be lower than productivity growth. 2008 2009 2010 2011 2012 Gross nominal wage, y oy Falling unemployment will have a positive effect on Net real wage, y oy Labour productiv ity per person employ ed, y oy wage growth. Unemployment has fallen to its lowest Source: Statistics Lithuania, Swedbank level since the beginning of 2009; it was 13.3% inThe reasons behind the sluggish wage growth were the second quarter of 2012 despite a record-highweak employee bargaining power due to the high activity rate, which reached 72.7% (amongst 15-64-unemployment rate and the uncertain demand year-olds). New job creation accelerated in theoutlook. summer months. According to the State Social Insurance Fund Board, the difference between theIn such an environment, inflation continued to number of employed and the number of firedoutpace wage growth. Net real wages have been workers was 47.8 thousand during January-July,decreasing since the beginning of 2009 and were compared with 31.6 thousand during January-May.0.7% lower than a year ago. Productivity, however,has been increasing steadily since the second half Nevertheless, new job creation is now limited due toof 2009 (mainly due to layoffs). Lithuania has been rigid labour market regulations. Difficulties in hiring Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000 E-mail: email@example.com www.swedbank.com Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720. Nerijus Mačiulis, +370 5 2582237. Vaiva Šečkutė, +370 5 258 2156.
The Lithuanian Economy Monthly newsletter from Swedbank’s Economic Research Department, continued No. 6 • 5 September 2012and firing workers deter businesses, in this Changes in prices of industrial production, except foruncertain environment, from increasing the number refined petroleum products, yoyof employees. 15Even though domestic factors should not createmuch inflationary pressure over the next few years, 10the current pre-election suggestions to increase theminimum wage to LTL 1,200-1,800, if realised, 5would change this scenario. The sluggish increasein average wages also suggests that a significant 0increase in the minimum wage would only result ina higher unemployment rate. For example, if the -5minimum wage were increased to LTL 1,800 (assuggested by some political parties), it would be -10higher than the average gross wage in such 2010 2011 2012average-sized cities as Šiauliai, Birš tonas, Total market Lithuanian market Non Lithuanian marketMarijampolė, and Palanga. Source: Statistics LithuaniaGross wage in separate cities and districts Last summer, prices of products sold in all markets 2500 rose at a similar pace. However, since domestic demand this year has been somewhat more 2431 2000 2207 resilient and competition has increased in foreign 2031 markets, the gap between industrial price growth in 1800 1774 1713 1500 1697 1544 1509 1487 Lithuanian and non-Lithuanian markets has 1485 1436 1415 1000 1200 expanded significantly. Nevertheless, industrial 500 price growth in the Lithuanian market has slowed since the beginning of the year, indicating 0 downward pressure for consumer prices. Marijampolė Klaipėda Alternative min. wage Palanga Alternative min. wage Alternative min. wage Vilnius Kaunas tonas Šiauliai Kalvarijos Panevėžys distr. Šiauliai distr. Šalčininkai distr. Birš CPI 6% 1.50% 1.25% Source: Statistics Lithuania 4% 1.00% 0.75%However, it is not likely that any of these 2% 0.50%suggestions will be realised. The issue of aminimum wage increase has been widely escalated 0.25%theme in the press lately. Therefore, declaring a 0% 0.00%goal of raising this level has become rather effectiveway to attract voters’ attention for some political -0.25%parties, even though it lacks economic sense. -2% -0.50%Inflation will subside 2010 2011 2012 Monthly growth (rs) Annual growth (ls)Industrial prices rose by 2% a month in July after Source: Statistics Lithuaniadeclining for three months. However, this was dueto an increase in refined petroleum product prices, Consumer prices, after contracting by 0.1% in June,as, excluding this, prices rose by only 0.4% in July. remained unchanged in July. Even though annualAnnual growth in industrial prices, except for refined inflation increased temporary to 2.8% in July,petroleum products, fell for the tenth consecutive average annual inflation continued on a downwardmonth in July. Industrial prices in the non- path and decreased to 3.5%. Average annualLithuanian market have fallen for six out of the inflation is expected to decline through the rest ofseven months so far this year. the year as well. The main inflation driver this year is global commodities prices, and this external factor will continue contributing the most to inflation growth in Lithuania. Moreover, gasoline and diesel price growth accelerated again in August and 2 (3)
The Lithuanian Economy Monthly newsletter from Swedbank’s Economic Research Department, continued No. 6 • 5 September 2012reached new record highs. This is affecting costs of will deter businesses from increasing pricesalmost all businesses. significantly. Businesses will be likely to compensate for some of these costs from their ownHowever, inflation expectations for the last two resources and accept smaller profit margins.months have decreased compared with the first halfof the year. Domestic confidence is weak,consumers are cautious, and the unemployment Vaiva Šečkutėrate, though falling, remains high. All these factorsSwedbankEconomic Research Department Swedbank’s monthly newsletter The Lithuanian Economy is published as a service to ourSE-105 34 Stockholm customers. We believe that we have used reliable sources and methods in the preparationPhone +46-8-5859 1028 of the analyses reported in this publication. However, we cannot guarantee the accuracy firstname.lastname@example.org completeness of the report and cannot be held responsible for any error or omission in thewww.swedbank.com underlying material or its use. Readers are encouraged to base any (investment) decisions on other material as well. Neither Swedbank nor its employees may be held responsible forLegally responsible publisher losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’sCecilia Hermansson, +46-8-5859 7720. monthly newsletter The Lithuanian Economy.Nerijus Mačiulis, +370 5 2582237.Vaiva Šečkutė, +370 5 258 2156. 3 (3)