Warm labour market boosts consumption

Although Baltic region is growing slower this year than in the previous two years, it has not yet affected workers and wages in the Baltics continue to increase rapidly. In the second quarter of this year, the average wage in Latvia increased by 7.8% compared to the previous year and reached 1083 euros before taxes. Meanwhile, in Estonia, average wage grew by 9% and in Lithuania by 7.9%, reaching 1419 and 1266 euros, respectively, before taxes. At the same time, unemployment continues to decline in the Baltics, which is now approaching its lowest point since the crisis. In Latvia in the second quarter it reached 6.4%, in Estonia - 4.9% and in Lithuania - 6.1%.

At present, with few exceptions, the Baltic countries are experiencing strong wage growth in almost all sectors and income levels. The highest level of remuneration in the Baltics is still in the financial and IT sector. The strong income growth also ensures steady growth in domestic consumption, and in the first six months of this year, retail sales in the Baltics have grown on average by 5-6% in euro terms, while household deposits with banks have increased by 8-11% year-on-year.

However, with the decline in unemployment rate the labour market is increasingly feeling the impact of demographic factors and employers are expected to face a chronic shortage of workers in almost all sectors for the foreseeable future. Demographic factors are already evident in the unemployment rate which is declining not only due to economic growth, but also to the shrinking working age population. This means that rather strong wage growth in the Baltics is expected to continue, which is an important precondition for stabilizing the migration flow. However, the current rate of wage growth is likely to be difficult to maintain.

In 2019 growth in the Baltic region has decelerated to 2-4% and short term data do not suggest that could accelerate in the near future. With such a very moderate growth in the economy, nearly 8% wage growth is definitely unsustainable. This may continue for some time at the expense of corporate profits and future investments, but not for long and in the coming years wage growth is likely to slow down slightly.