Lithuanian Economy, No. 6 - September 5, 2012:Prices, productivity, and wages will move in lockstep

1. The Lithuanian Economy
Monthly newsletter from Swedbank’s Economic Research Department
by 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 second
quarter this year, a trend that has been continuing We forecast that the internal devaluation will be
for three-and-a-half years. Annual gross wage over this year and net real wages will increase by
growth decelerated from 3.2% in the first quarter to 1.4%. Although we understand that there is a
2.2% in the second this year. Quarterly growth, tangible downside risk to our forecast, upward
also, amounted to only 0.7%. pressure on wages should be created by structural
unemployment issues. Wages for skilled employees
Wage 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% in
The reasons behind the sluggish wage growth were the second quarter of 2012 despite a record-high
weak 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 the
outlook. summer months. According to the State Social
Insurance Fund Board, the difference between the
In such an environment, inflation continued to number of employed and the number of fired
outpace 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 to
of 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: ek.sekr@swedbank.com www.swedbank.com
Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720.
Nerijus Mačiulis, +370 5 2582237. Vaiva Šečkutė, +370 5 258 2156.

2. The Lithuanian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
No. 6 • 5 September 2012
and firing workers deter businesses, in this Changes in prices of industrial production, except for
uncertain environment, from increasing the number refined petroleum products, yoy
of employees. 15
Even though domestic factors should not create
much inflationary pressure over the next few years, 10
the current pre-election suggestions to increase the
minimum wage to LTL 1,200-1,800, if realised, 5
would change this scenario. The sluggish increase
in average wages also suggests that a significant 0
increase in the minimum wage would only result in
a higher unemployment rate. For example, if the -5
minimum wage were increased to LTL 1,800 (as
suggested by some political parties), it would be -10
higher than the average gross wage in such
2010 2011 2012
average-sized cities as Šiauliai, Birš tonas, Total market Lithuanian market
Non Lithuanian market
Marijampolė, and Palanga.
Source: Statistics Lithuania
Gross 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 a
minimum 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 effective
way 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 Lithuania
declining for three months. However, this was due
to 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 annual
Annual 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 downward
month in July. Industrial prices in the non- path and decreased to 3.5%. Average annual
Lithuanian market have fallen for six out of the inflation is expected to decline through the rest of
seven 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
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3. The Lithuanian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
No. 6 • 5 September 2012
reached new record highs. This is affecting costs of will deter businesses from increasing prices
almost all businesses. significantly. Businesses will be likely to
compensate for some of these costs from their own
However, inflation expectations for the last two
resources and accept smaller profit margins.
months have decreased compared with the first half
of the year. Domestic confidence is weak,
consumers are cautious, and the unemployment
Vaiva Šečkutė
rate, though falling, remains high. All these factors
Swedbank
Economic Research Department Swedbank’s monthly newsletter The Lithuanian Economy is published as a service to our
SE-105 34 Stockholm customers. We believe that we have used reliable sources and methods in the preparation
Phone +46-8-5859 1028 of the analyses reported in this publication. However, we cannot guarantee the accuracy or
ek.sekr@swedbank.com completeness of the report and cannot be held responsible for any error or omission in the
www.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 for
Legally responsible publisher
losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’s
Cecilia Hermansson, +46-8-5859 7720.
monthly newsletter The Lithuanian Economy.
Nerijus Mačiulis, +370 5 2582237.
Vaiva Šečkutė, +370 5 258 2156.
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