Bank of Lithuania forecast – how will we live next year?

On a Monday press conference on 19 December, Bank of Lithuania (LB) economists announced that in 2017 wages should rise by 5.7% in Lithuania. This is less than this year (7.3%), while inflation will be far higher – 1.9% (was 0.6% in 2016).

LB forecasts that in 2017 the state economy will grow by 2.4%, thus faster than this year, but not as much as predicted in autumn. Earlier LB forecast that in 2016 the GDP will grow by 2.3%, while in 2017 – by 2.9%.

LB economists state that the reduction in economic forecasts is due to lower export and investment growth. Long term economic growth will be increasingly limited by unfavourable demographic trends and emigration.

Deputy Chairman of the Board of the Bank of Lithuania Raimondas Kuodis stated that the economy is growing, but this is not halting emigration rates.

“22 thousand citizens depart to work abroad per year that is about how many people live in Ukmergė. Unfortunately we currently see no basis for this trend to change next year either,” he said.
The LB stresses that demographic trends are no less harmful for the labour market. Since birth rates decreased earlier, now ever fewer young people enter the labour market every year, which accentuates the lack of potential hires.

With employers competing for potential remaining hires, wages are rising at the fastest rates in Europe. The constant rising of the minimum monthly wage also contributes to this.

With wages rising, LB economists stress that it is necessary to ensure labour efficiency keeps up. Unfortunately currently the gap between wages and labour efficiency is one of the largest in the European Union.

If such trends continue, businesses will lose the advantages they have so far held in international markets.

Export grew

LB economists note that in 2016 exports grew by 3%.

“This was mostly a result of no longer contracting re-export and continuing export of the earlier year’s harvest. In 2017, however, this positive effect will end, thus export will be more influenced by circumstances in our foreign trade partners and the competitiveness of our exporters,” said Gediminas Šimkus, Director of the Economics and Financial Stability Service at the Bank of Lithuania.

Next year there should be usage of support funds from European Union funds, investment should rise again then, something that decreased in 2016. This was most felt by the construction sector.
LB economists forecast that both business development and wage rises should result in higher consumption.

Inflation could reach 1.9% in 2017 LB economists believe. Prices will mostly be raised by the forecast recovery in oil prices and increase in food product prices.