Lithuanian labour market so far so good, but challenges are increasing

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1 Article Macro I. focus Titel Macro focus March 4, 216 Lithuanian labour market so far so good, but challenges are increasing Last year, GDP growth was mostly driven by very strong domestic demand. Rapid real wage bill growth and better expectations fuelled household consumption, while high capacity utilisation, sagging competitiveness, and abundant financial resources fostered investment growth. Employment growth last year remained quite high. However, employment growth was somewhat limited by the lack of skilled labour and shrinking labour force in general. These factors will limit employment growth in the coming years as well, while wage pressures will rise. Wage growth will continue to outpace productivity this year. Investment in productivity last year increased significantly, and we expect investment growth to remain strong throughout this year. However, high structural unemployment and the rapidly shrinking labour force require policy actions. Last year, economic growth was almost exclusively driven by strong domestic demand growth, which increased even more than in 214. Domestic demand (except for inventories) rose by 5.4% last year (3.9% in 214)--the fastest growth since 211, when GDP increased by 6%. Investment last year increased by 1.3%, as the necessity to invest and available finances outweighed the uncertainty. Declining prices, rising wages, and increasing employment pushed the real wage bill up by 6.8% last year. This, along with improving consumer confidence, helped household consumption to grow by 4.9%. Nevertheless, this divergence indicates that the household savings ratio may have increased last year. 1% 5% % -5% -1% -15% Annual growth of retail trade, real wage and consumption -2% f17f Consumer confidence, points (rs) Real wage bill, yoy Household consumption, yoy Source: Statistics Lithuania Despite the geopolitical uncertainties, Russian crisis, and weakening exports, employment still increased by 1.2% last year. The fastest employment growth was recorded in construction (in the first half of last year) and other services sectors; nevertheless, employment growth in manufacturing, which had to adjust to lost markets in the east, was significant as well. Even though domestic demand-dependent sectors contributed more to employment growth, employment growth increased somewhat in the open sectors as well. Employment and its annual growth in 215 Trade Manufacturing Education Agriculture Construction Transportation and storage Health Public administration Professional act. Administrative act. Accommodation and food Arts, entertainment ICT Other service act. Financial, insurance act. RE activities Water supply, waste Electricity, gas, steam Mining and quarrying 3.%.1% -1.1% 2.7% 5.4%.7% -3.6% 13.9% -5.5% 1.1% -5.2% 1.8% 3.2% -44.4% -3.5% 2.1% Source: Statistics Lithuania. thous of 5

2 Job creation in 215 did not stall as the number of registered vacancies in the Lithuanian Labour Exchange increased by 3.9% compared with 214. The number of vacancies last year, according to the Statistics Lithuania survey, increased even more rapidly by 13.7%. This was the fastest growth since 211. However, employment growth was probably limited because it has become harder to fill the vacancies with the right candidates. The number of unemployed per one vacancy is the lowest since 28, and the vacancy rate last year was the highest since 28. In the ICT sector, the vacancy rate is even significantly higher than in 28 and the second highest in the economy after the financial and insurance sector Number of registered unemployed per one vacancy and wage growth month average Long term average Gross wage growth ( right scale) Sources: Statistics Lithuania and. Structural unemployment is high, and, as unemployment decreased to 9.1% last year, it is probably now very close to the natural rate of unemployment. Many current unemployed lack motivation or the right skills to fill the growing number of vacancies. For example, during the last year almost 2% of all registered unemployed had no work-related experience, 38% were lacking professional education, and 18% had lost their qualifications due to not working for more than two years. Moreover, as the activity rate growth slowed, the labour force decreased again last year. The labour force will most likely continue to shrink this and following years despite a rising activity rate. Therefore, it is very likely that the unfavourable demographic trends and high structural unemployment will slow employment growth this year, and employment might not grow at all in The lack of a qualified labour force due to unfavourable demographic trends and high structural unemployment will further push wage growth, which rose by 5.1% last year (and by 6% in the private sector). In sectors where the shortage of a qualified labour force is greater, wages grew even more rapidly, e.g., by 8.4% in the ICT sector. This year, rising wages for some public sector employees will contribute to wage growth as well. Last year, wages in the public sector rose by only 3.8%. Moreover, the 17% hike in the minimum wage will increase average wages by 1.4% and may also have secondary effects, as more skilled employees will negotiate to preserve wage differentiation. Art, entertainment ICT Accomodation, food Manufacturing Professional act. Administrative act. Financial, insurance act. Other service act. Trade Construction Health RE activities Transport, storage Mining Water supply, waste Agriculture Education Electricity, gas, steam Public administration Total 9.% 8.4% 7.6% 6.9% 6.8% 5.3% 5.1% 4.6% 4.5% 4.5% 4.1% 3.7% 3.5% 3.% 2.6% 2.1% 5.1% % 5% 1% 15% Source: Statistics Lithuania, For this reason, we forecast the average wage to increase by 6.5% and employment to rise slightly. And, despite higher inflation, the real wage bill will increase by more than 5% this year as well. Budget revenues from personal income taxes in January suggest that wage growth has accelerated and employment growth has so far most likely not subsided. Personal income tax revenues were 12% higher than at the same time a year ago. Accelerating wage growth will have a positive effect on economic growth this year, as it will further fuel household consumption growth the main economic growth driver. On the other hand, wage growth will continue to outpace productivity growth. 25% 2% Nominal gross wage growth in 215 Wages and productivity, annual growth rates 15% 1% 5% % -5% -1% Gross nominal wage, yoy Net real wage, yoy Labour productivity per person employed, yoy Nominal unit labour costs Source: LDS, HBM Sources:Statistcs Lithuania, and. During the post-crisis period, Lithuanian companies have invested less than their peers in other Baltic countries and 2 of 5

3 most other EU countries. However, investment growth was rapid last year, especially in the private sector. Investment in fixed tangible assets in the private sector rose by 15.5% (in nominal terms) last year, and, more important, total investment in productivity and capacity (acquisition of transport, machinery, and equipment) increased by 13.7% in real terms. This trend is expected to continue throughout this year as well, as new EU structural funds become available, financing conditions remain favourable, and competitiveness pressures force to invest in productivity. Nevertheless, high structural unemployment and the decreasing labour force require policy actions. labour force. This would increase the potential growth of the economy and stop or slow the overheating of the labour market. Vaiva Šečkutė Higher immigration and re-emigration would help to slow the decrease in the labour force. Lithuanian labour exchange statistics on permissions granted for employing foreigners show that there might have been some progress in this area, as it increased by 75% last year. However, total immigration last year, contrary to the previous few years, decreased by 2.7%, indicating that reemigration most likely was decreasing as well. A more effective education system and training for the unemployed would help to address the current mismatch in the labour market. The Lithuanian Labour Exchange is now carrying training programmes supported by EU structural funds worth about EUR 15 million (almost EUR 1, per one registered unemployed person). However, these training programmes could be more effective. For example, at the end of 214, 21,1 unemployed were participating in active labour market policies; however, during the last year, these policies resulted in a decrease in unemployment of only.9 percentage point-- about 1,6b people. Liberalising strict labour market regulations would contribute to lowering structural unemployment as well. There is also space to increase the labour force participation rate. Even though labour force activity has increased significantly lately and surpassed the EU average, it still remains lower than in the other Baltic countries, especially Estonia. Lower labour taxation should encourage more people to be active. One area where there is lots of room for progress is activity of the youth. Two-thirds of the population aged is inactive in the labour market. Often this is because studies in Lithuania are unnecessary long. Such actions could help to address the challenges related to high structural unemployment and the rapidly shrinking 3 of 5

4 Contact information Large Corporates & Institutions Landsvägen 4, Sundbyberg SE Stockholm, Sweden Research Head Olof Manner Phone: +46 () Macro research Acting Head of Macro/Head of Economic Forecasting Magnus Alvesson Phone: +46 () magnus.alvesson@swedbank.se Group Chief Economist Anna Breman Phone: +46 () anna.breman@swedbank.se Chief Economist Norway Harald-Magnus Andreassen Phone: harald.magnus.andreassen@swedbank.no Head of Baltic Macro Research Chief Economist Latvia Mārtiņš Kazāks Phone: martins.kazaks@swedbank.lv Chief Economist Estonia Tõnu Mertsina Phone: tonu.mertsina@swedbank.ee Chief Economist Lithuania Nerijus Mačiulis Phone: nerijus.maciulis@swedbank.lt Head of Strategy and Allocation Madeleine Pulk Phone: +46 () madeleine.pulk@swedbank.se Macro Research Sweden Knut Hallberg Phone: +46 () knut.hallberg@swedbank.se Jörgen Kennemar Phone: +46 () jorgen.kennemar@swedbank.se Åke Gustafsson Phone: +46 () ake.gustafsson@swedbank.se Cathrine Danin Phone: +46 () cathrine.danin@swedbank.se Martin Bolander Phone: +46 () martin.bolander@swedbank.se Sihem Nekrouf Phone: +46 () sihem.nekrouf@swedbank.se Norway Øystein Børsum Phone: oystein.borsum@swedbank.no Helene Stangebye Olsen Phone: hso@swedbank.no Estonia Liis Elmik Phone: liis.elmik@swedbank.ee Siim Isküll Phone: siim.iskull@swedbank.ee Latvia Lija Strašuna Phone: lija.strasuna@swedbank.lv Andrejs Semjonovs Phone: andrejs.semjonovs@swedbank.lv Lithuania Vaiva Šečkutė Phone: vaiva.seckute@swedbank.lt Strategy FX Anders Eklöf Phone: +46 () anders.eklof@swedbank.se Emerging markets Hans Gustafson Phone: +46 () hans.gustafson@swedbank.se Senior Rate Strategist Pär Magnusson Phone: +46 () par.magnusson@swedbank.se 4 of 5

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