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In Projections of the Ministry of Finance – Reservedly Optimistic Economic Growth

Date

2016 03 18

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After assessment of economic situation of the Lithuanian economy and the impact of external factors on development trends, the Ministry of Finance updated the perspectives for the key macroeconomic indicators for 2016-2018 and prepared them for the year 2019.

The scenario prepared by the Ministry of Finance envisages that the reduced dependency on the Russian market, relatively stable development of the main export markets of Lithuania (based on the European Commission Winter 2016 Forecast) and the incentive economic management policy at EU level implemented within the medium term will create the basis for a more accelerated than in 2015 and sustainable economic growth of Lithuania.

Economic Development Scenario for 2016–2019

In 2016 Lithuania’s GDP growth might be by 0.6 percentage points higher than in the previous year – about 2.5%.

Although this year Lithuania’s economic growth is projected to be slower by 0.7 percentage point than projected in September last year, it will continue to remain among the fastest ones in the European Union and the euro area. For this year the Ministry of Finance projects GDP growth of 2.5%, while the Commission’s forecast for Lithuania is 2.9%.

The projection of lower than expected in the autumn of 2015 GDP growth in 2016 was predetermined by the assessment of the changing external environment and changes in the sectors of construction and agriculture.

It is projected that in 2016 after the reduction of dependency on the Russian market and recovery of external demand, the accelerated exports of goods and services will provide a stimulus to GDP growth at even more accelerated pace in 2017 – about 3.2%. In the later years of the medium term, due to unfavourable demographic trends, a slower, but still over 3% GDP growth is expected: both in 2018 and in 2019 – by 3.1% each year.

It is anticipated that recently changing negotiating powers in the labour market within the medium term will improve   wage perspectives of the employed. It is projected that in 2016 the number of the employed will increase by 0.6%, in 2017 – by 0.3%, in 2018-2019 – by 0.1% each year, and the unemployment rate will consistently decrease: in 2016 it will make up 8.0%, in 2017 – 7.1%, in 2018 – 6.3%, and in 2019 – 5.4%.

Due to increasing labour demand the wage increase rate will remain accelerated in the medium term and will consistently grow within the whole period: in 2016 – by 5.8%, in 2017 – by 6.0%, in 2018 – by 6.1%, and in 2019 – by 6.2%.  The highest wage increase will be in private sector ‒ in the activities with high labour productivity, high labour demand and in the activities with the lowest wages. In such case the minimum monthly wage (MMW) increase will have a significant impact (from January 2016 the MMW was increased by EUR 25 up to EUR 350).

As a result of wage growth, income of the population will also steadily increase in the medium term. As in recent years, the Lithuanian population will allocate the greatest share of its income to consumption of goods and services; however, the rise in the rate of inflation will reduce the purchasing power of the population; therefore, household consumption costs (at constant prices) will increase at a slower pace in the medium term than in 2015.  It is projected that in 2016 real consumption will expand by 3.6%, in 2017 – by 3.4%, in 2018 – by 3.3%, and in 2019 – by 3.2%.

In 2016 low inflation rate of 0.7% is projected, and from 2017, as the negative impact of external factors disappears (after recovery of global oil prices), acceleration of inflation is envisaged, which will continue over the entire medium term: in 2017 inflation rate is projected to be 2.2%, in 2018 and 2019 – 2.5% each year.

Given that unused labour resources in the country are decreasing, in the medium term enterprises will face the lack of not only qualified labour force but also that of the unqualified one. As labour supply decreases and labour cost increases, the opportunities to benefit from the advantages of cheap labour force in competition will decline: higher value added generating output production and exports will grow. Domestic demand will remain a major GDP growth component, and export contribution to GDP growth will strengthen over the entire medium term.

The economic indicators envisaged in the Economic Development Scenario would improve if the euro becomes even cheaper than it was projected in preparation of the Scenario. The Lithuanian exporters might benefit from that by trading with non-euro area countries and thus accelerate export development more than projected. Higher economic activity in the EU and the euro area would also be a positive economic development factor.

Negative risk for the projections basically arises due to uncertainty of the external economic environment.

Public Relations Division
Phone: +370 52390 022
vrs@finmin.lt
www.finmin.lrv.lt