Lithuanian corporate profits come close to record highs but labour costs pose threat

However, growing labour costs could affect further investments and slow down the economy, according to Rokas Grajauskas, Danske Bank‘s chief economist in the Baltic countries.

He said the huge change in the level of profits between 2014 and 2015 was down to four key reasons. First, an almost €500 million profit in the energy sector profit after the sector made a loss in 2014. Secondly, a significant positive change in profit recorded by the largest company in Lithuania, Orlen Lietuva, the company earned €261 million in pre-tax profits.

Thirdly, the manufacturing sector performed well last year. Excluding petroleum and tobacco products, total production profits increased by €142 million and was up to 20% higher than in 2014.

Fourth, a more active State Tax Inspectorate in combatting tax evasion also may have contributed to at least partial extraction of profits from the black economy.

Nevertheless, Grajausakas said that uncontrolled labour cost growth could cause trouble for Lithuanian companies in the near future. Lithuania could soon find itself in the same situation as Estonia, where salaries are about 1.5 times higher than in Lithuania, and the growth rate continues to be faster than Lithuania‘s, he said.

One of the main reasons why Estonian companies’ profits have been growing very slowly in recent years is rising labour costs according to the economist, which in turn can cause a significant investment contraction and in the long run may affect the country’s economic potential.

Taking into account the fact that wages in Lithuania have been growing significantly due to the demand-supply mismatch in the labour market, the state could deal with the problem by adjusting the educational system to labour market needs, Grajauskas said.

Companies should allocate more funds to increasing efficiency, as more and more rapidly rising labour costs will gradually begin to “eat” a growing share of profits, he said.

Alfa.lt