Despite rising inflation, the war in Ukraine, the impact of sanctions and a sharp increase in geopolitical uncertainty, Lithuania continues to see double-digit wage growth, rapid job creation and falling unemployment. Although the war in the East and rising prices have led to a drop in consumer confidence, people’s worries about their personal and national economic well-being appear to be so far unfounded Greta Ilekytė wrote in TV3.lt news portal.
However, it should be noted that the labour market is inert, so the negative impact of war, sanctions and geopolitical uncertainty may only become apparent in the second half of this year.
Rapid wage growth
According to the data of the Statistics Department, in the first quarter of this year, wages in Lithuania were still growing at a double-digit rate – the average salary rose by 14% over the year and currently stands at EUR 1,087 after taxes.
Data recently published by Sodra also show that private-sector wages were 14.5% higher than a year ago in the first four months of this year. Swedbank’s customer data also shows a very similar increase.
However, due to rapidly rising prices, real wages have fallen slightly after taking into account the impact of inflation. However, this decline was only 2.6%, which was less than expected in the wake of the war in Ukraine. Moreover, base effects are likely to put real wages back on a positive growth trajectory in the second half of the year.
However, it has to be said that such rapid wage growth is not very sustainable. With wage growth outpacing productivity growth by several times, some firms could lose competitiveness, which would mean losing potential export markets. While global demand and trade have been growing rapidly, this problem has not been apparent, but it may become more pronounced as the world economy slows down.
Rising employment and falling unemployment
According to Eurostat, job creation has continued at a strong pace this year, with employment at record highs. Meanwhile, the unemployment rate has already reached pre-pandemic lows.
Looking at these indicators, the figures are positive, which is not surprising given that many sectors of the economy continued to show impressive growth in the first quarter of this year. Manufacturing, for example, was almost a quarter higher than a year ago.
On the other hand, there is a shortage of available resources. A third of companies in the construction, industry and services sectors still identify staff shortages as the main factor limiting their activities.
In the first quarter of this year, the number of job vacancies remained at a record high of almost 27,000, up by a third compared to a year ago. This shows that companies continue to plan for expansion and those staff shortages are still an acute problem, so the bargaining leverage remains in the hands of employees.
With more than 50,000 Ukrainian nationals fleeing the war already having arrived in the country, some of them are slowly integrating into the Lithuanian labour market.
The April data indicate the first signals that the labour market situation is indeed becoming a little more relaxed.
Record savings and shopping rush
Lithuania’s savings are still close to €20 billion, significantly higher than before the pandemic hit. There are also no clear signs so far that the population has started to use its accumulated financial reserves for its everyday needs.
Moreover, retail sales continue to grow, with retail sales in April 2.7% higher than in the same period a year earlier. It is important to underline here that it is not so much the amount of money spent by the population that has increased but rather the number of goods and services purchased. In other words, even in the face of rapidly rising prices, people are finding opportunities to increase their consumption.
Swedbank’s payment card data also indicate this situation. Despite inflation, worries about the war in the East, and falling expectations, people’s spending reached record highs in May this year. Moreover, spending on non-essential goods and services is rising rapidly. For example, hotel and airport bills are already well ahead of pre-pandemic levels.
There is also a noticeable reluctance to change pleasant habits. In Lithuania, spending in the catering sector continues to rise rapidly and has increased by the highest amount over the year compared to the three Baltic countries. The desire to buy a new home has not yet diminished, nor has the demand for household goods and electronics.
Clouds over the economy
Looking at the official labour market and economic indicators, there are few signs of concern so far. It seems that people’s worries about their financial situation are somewhat unfounded for the time being, especially in view of the continuing increase in spending on non-essential goods and services.
However, with the war in Ukraine now in its fourth month, the problem of broken supply chains remains acute, and with China’s economy limping along, the storm clouds over Lithuania’s growth prospects are not going away. Moreover, it seems that the European Central Bank’s decision to raise interest rates, which should also slow down the population’s willingness to spend, is likely to come as early as the summer.