Economist: Wages are growing faster than thought, but prices are growing more slowly

According to the report, SEB economists maintain the forecast that the European Central Bank will lower 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.

As T. Povilauskas comments, better-than-expected GDP data for the first quarter of 2024 were published on Tuesday. However, SEB Group’s forecasts were updated earlier, and the published indicators no longer influenced the updated forecast.

“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 costs 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”, comments T. Povilauskas.

As stated in the report, this time the biggest changes in 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, SEB analysts increased its growth forecast from 8.5 to 9.2 percent.

“Such factors as from January 1, 10 percent 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,” comments T. Povilauskas.

Average unemployment is predicted to 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 employees was one of the most limiting factors for the growth of companies, says economist T. Povilauskas.

Since during the first four months of this year inflation was lower than SEB had previously predicted, the average annual inflation forecast for this year was reduced 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”, says the economist.

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 house prices will increase a little this year as well”, says T. Povilauskas.

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. It is predicted 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 reduce the 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 January’s forecasts, the number of key interest rate cuts forecasted by the US central bank has to be significantly reduced. .

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 at the end of the year it should be more expensive than now and cost 1.09 US dollars”, says T. Povilauskas.