SEB Group has updated its macroeconomic forecasts – don’t forget the day without the evening – AINA

The author of the comment is Tadas Povilauskas, an economist at SEB bank.

This year, the population’s purchasing power is recovering, the labor market is relatively stable, and industrial production is also slowly climbing out of the hole. This is also shown by 0.8 percent in the first quarter. an increase in the country’s GDP – this growth rate has been historically common over the past decade. However, one does not want to rejoice prematurely and claim that this or even faster pace will remain in the coming quarters. SEB economists maintain the forecast that the European Central Bank will reduce the base interest rates in June, and this would be a good boost for the economy of Lithuania and the euro zone. The Federal Reserve System (FED) will start reducing the base interest rates due to persistent higher-than-forecasted inflation no earlier than in the fall. You can find these and other detailed insights of SEB Group economists in the publications “Nordic Outlook” and “Lietuvos ekonomikos omvnevna” published on Thursday.

You can find the Nordic Outlook publication here, the 86th issue of the Lithuanian Macroeconomic Review here.

The beginning of the year brings hope that the worst is over

Better-than-expected GDP data for the first quarter of 2024 was released on Tuesday. However, SEB Group’s forecasts were updated earlier, and the published indicators no longer influenced the updated forecast. However, we understand that the current 1.5 percent The GDP growth forecast is becoming too conservative and, without changing the assumptions about GDP changes in the coming quarters, real GDP should grow by at least 2 percent this year. Next year, we expect 2.8 percent. Lithuania’s GDP growth.

It should be reminded that the country’s GDP shrank by 0.3% last year, so the fact that the economy grew in the first quarter of this year shows that it has managed to get out of the stagnation seen last year. The main drivers of economic growth are those we have written about in the introduction of previous publications. Real household consumption is recovering this year, as household incomes are growing much faster than inflation. If the changes in the coming quarters do not disappoint, household consumption should continue to grow. The growth would be much faster if not for the increase in interest expenses during the year. However, the situation is improving here as well – the peak of paid interest expenses is already in the past, because interest rates are no longer increasing, and should start to decrease more rapidly in the second half of the year.

The inflation forecast was lowered, the average salary was raised

This time, the biggest changes in the forecasts are related to the assumptions regarding this year’s average wage and inflation changes. Since the average wage in Lithuania grew more than expected in the first months of this year, we increased its growth forecast from 8.5 to 9.2 percent. Factors such as 10 percent from January 1. increased the minimum monthly wage (MMA) or more than a tenth of the increase in the salary of public sector employees, but we were too pessimistic when thinking about the decisions of private sector employers regarding salary changes this year. Of course, in many private companies, salary revisions take place in March and April, so only then will it become clear how much such companies have increased the wage bill this year. However, the January and February data already show that this year employers increased wages more than the added value they created grew.

We forecast that average unemployment will increase from 6.8 percent in 2024. to 7 percent, and next year it will decrease to 6.6 percent. The State Data Agency will publish unemployment data for the first quarter in less than a week. In the last quarter of 2023, unemployment was 7.4 percent, and it slightly increased in the first quarter of this year. The labor market is no longer as hot as it was two or three years ago, when the lack of workers was one of the main factors inhibiting the growth of companies.

As inflation was lower than we forecast in the first four months of this year, we are lowering our average annual inflation forecast for this year from 2 to 1 percent. We believe that we will not see annual deflation in Lithuania this year. The biggest threat in forecasting this year’s inflation remains a possible jump in energy product prices due to the possible further escalation of geopolitical tension and its impact on the supply of oil and natural gas. 2025 average 2.7 percent. we left the annual inflation forecast unchanged. We believe that the prices of energy products will not decrease next year, and the inflation of service prices will remain similar.

Industrial performance improved slightly in the first quarter, with production volume increasing and energy product prices lower. The sales volume of industrial production, excluding oil products, at comparative prices was 0.8 percent. higher than a year ago, but approximately 11 percent. lower than the corresponding quarter of 2022. By the way, according to the annual change in industrial production this year, Lithuania is one of the leaders in the countries of the European Union. The latest surveys of industrial firms show that expectations for output in the coming months have improved slightly, but remain historically weak.

This year, the total number of registered housing transactions will be slightly lower than last year. At the beginning of the year, we still see an annual decline in transactions, but from the middle of the year, the change should already be positive. The highest hopes for a stable number of transactions are related to lower interest rates. The annual change in housing prices is already lower than the average wage, and annual inflation is close to zero, so housing affordability indicators have started to improve. So far, it seems that housing prices will increase slightly this year as well.

The US economic forecasts for 2024 have improved more than those of the Eurozone

Economists of the SEB Group predict that the economy of the euro zone will grow by 0.6 percent this year. The forecast is a slight increase from the forecast updated in January. The euro zone economy grew by 0.3 percent in the first quarter, or more than expected. We forecast that the average annual inflation in the euro zone should be 2.2 percent this year, but it will decrease to 1.1 percent next year. SEB analysts believe that the European Central Bank will cut base interest rates four times this year, and the base interest rate for using the deposit facility (Deposit Facility Rate) will decrease from 4 to 3 percent. At the end of next year, the interest rate should be 2 percent.

US economic indicators significantly exceeded expectations, so this year’s GDP growth forecast was increased from 1.6 to 2.5 percent. In contrast to the euro area, the scale of household consumption in the US is growing at a historically high pace this year as well. The economy continues to be positively influenced by the government’s economic policy – this year the US budget deficit will be 6.5 percent. GDP. Average annual inflation in the US should be 3.4 percent this year, and 2.5 percent next year. Compared to the January forecast, the number of key interest rate cuts forecasted by the US central bank has to be reduced significantly. We believe that the central bank will cut the base interest rate twice this year, four times next year, and at the end of next year it will be 4 percent. The euro may weaken against the US dollar by the middle of the year, but by the end of the year it should be more expensive than now at 1.09 US dollars.