The central bank forecasts that in 2019, wages should rise by 6.9%. Meanwhile, the inflation forecast for next year is 2.4%. Unemployment levels should reach 6.1% in 2019.
"Domestic consumption will continue to be an important driver of economic growth, which is spurred on by growing wages in not only the private, but also the public sector, as well as the increases to minimum wage. Export and investment will grow slower due to world trade trends," Bank of Lithuania Economic and Financial Stability Service director Gediminas Šimkus is quoted as saying in a Wednesday press release.
Inflation forecast increased
It is noted that the lack of qualified employees will continue to rapidly increase wages, however at the same time, the Bank of Lithuania notes that companies have accumulated large financial reserves. This means that they can choose how to develop their businesses – continue raising rages or invest in other measures that increase work efficiency.
The Bank of Lithuania predicts that wages will have grown 9.5% this year – 0.8% higher than forecast in October. The change was due to larger factual growth than expected.
Wage growth will continue to surpass price growth, with price growth influenced by both external and internal factors. Overall price growth will be supported by rising work costs, which are particularly increasing service prices. The increase in these has for a time now driven a third of all inflation.
Raw materials prices will also have a significant impact. While currently the global oil prices have significantly declined, nevertheless this autumn the price of oil was on average a third greater than last year and this increased prices for consumers. So far it is predicted that next year the price of oil will rise much less than this year, which will suppress inflation.
Food prices leave a number of questions. While they mostly declined this year, these prices could begin rising due to unfavourable for farming weather conditions this year. For example, the prices of vegetables are already significantly up, this being one of the reasons why the inflation forecast for 2019 is up by 0.2% from 2.2% to 2.4%.
Labour market challenges
The Bank of Lithuania predicts that unemployment will continue declining, going from 6.3% this year to 6.1% in 2019. Key demographic trends and the challenges they pose to the labour market are not changing – the number of working age (15-64 year old) individuals is continuing to decline.
This shows that more people retire than enter the labour market. This effect is somewhat cushioned by immigrants, who mostly arrive to work in the transport and construction sectors.
While investment growth drove global economic growth in 2017, it's slower increase will lead to global trade growing almost a fifth less this year than last. Because of more careful expectations among market participants due to restrictions in international trade, unrest in some developing countries, the international trade of the Eurozone, CIS countries and developing Asian and Latin American countries has especially slowed down.
Due to this, the Bank of Lithuania is decreasing both this and next year's export growth forecasts. That said, it is notable that so far, the expansion of export, especially of local origin goods is not falling behind overseas demand. This shows that the Lithuanian producers' overseas market share is gradually increasing and this trend is expected to continue in the short term.