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Baltic Household Outlook: So far - better than expected

Baltic Household Outlook: So far - better than expected

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Published by SEB Group
Gradual growth of real wages has resumed in Estonia and Latvia, while in Lithuania real wages remains on downward trend, according to the latest SEB Baltic Household Outlook. The real wages in Estonia increased for the fourth quarter in a row, albeit, at a slower pace than in the previous quarters. SEB's economists project that labour income will continue to rise gradually going forward.
Gradual growth of real wages has resumed in Estonia and Latvia, while in Lithuania real wages remains on downward trend, according to the latest SEB Baltic Household Outlook. The real wages in Estonia increased for the fourth quarter in a row, albeit, at a slower pace than in the previous quarters. SEB's economists project that labour income will continue to rise gradually going forward.

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Categories:Business/Law, Finance
Published by: SEB Group on Oct 23, 2012
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01/07/2013

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Baltic Household Outlook
October 2012
So far - better than expectedTHE BALTICS
Estonia posted the biggest increase in employment – in the second quarter by3.6 per cent compared to the same period of 2011. In Latvia and Lithuaniaemployment grew by 2.2 per cent and 1.4 per cent respectively.Growth of real wages has resumed in Estonia and Latvia, while in Lithuaniareal wages remains on downward trend.Employment growth and rising wages supported the private consumption,moreover in Lithuania and Latvia the household consumption expendituresgrew faster than income.In the first half of 2012 the growth rate of spending abroad outpaced rise indomestic spending.Households in all three countries increased their net financial worth.Due to low interest rates short term deposits were losing their attractiveness,besides holdings of cash were increasing.The fall of loan volumes is slowing down in Estonia and Lithuania while inLatvia the deleveraging continues at the same speed.Households benefit from historically low Euribor rates. Households experiencethe lowest mortgage interest rate in Estonia (in June 2012 for mortgage ineuro 2.9 per cent annually) followed by Lithuania (3.2 per cent) and Latvia (3.5per cent).The household sector’s investment rate is lower than the EU average. In orderto increase the useful floor area of dwellings, it should be increased.Households liquidised extensively their real estate in 2002-2007 and half ofthe additional funds was consumed. Since 2008 households are injectingfunds to the real estate at the expense of their consumption.
Edmunds Rudzitis
Socioeconomics ExpertSEB LatviaTelephone: +371 67215933edmunds.rudzitis@seb.lv
Julita Varanauskiene
Household EconomistSEB LithuaniaTelephone: +370 52682518 julita.varanauskiene@seb.lt
Triin Messimas
Household ExpertSEB EstoniaTelephone: +372 6656175triin.messimas@seb.ee
Merike Kukk
Research
S
cientistTallinn University of TechnologyTelephone:
+372 6204069
merike.kukk@tseba.ttu.ee
 
Baltic Household Outlook
Even with some slower growth in the first half of 2012,economic conditions in the Baltic countries remainpositive. In the first two quarters of this year Latvia wasthe fastest growing economy among the 27 EuropeanUnion countries, followed by Lithuania and Estonia.In contrast to 2010-2011, when economic recovery ofBaltic countries was mainly driven by strong exportLabour market situation continue to improve in line witheconomic growth. Due to seasonal factors and slowerglobal growth unemployment increased slightly during thefirst quarter of 2012. Unemployment started decliningagain from April, by mid-2012 reaching the lowest levelsince the last quarter of 2008 in Estonia. In Lithuania andLatvia in the second quarter unemployment rate was atthe lowest level since the first quarter of 2009. Althoughunemployment rate has decreased significantly since thetrough of the recession, share of long-term unemployedpersons (persons who had been looking for a job for oneyear or more) remains high. In Latvia the share of long-term unemployed among all unemployed persons was54.1 per cent, in Estonia and Lithuania 52 and 48 per centrespectively, reflecting also some structural problems inlabour market.Estonia posted the biggest drop in unemployment duringthe last 12 months – in the second quarter unemployment(job seekers) rate was 10.2 per cent, 3.1 percentage pointslower compared to the same period of 2011. In Lithuaniaunemployment rate declined by 2.3 percentage points to13.3 per cent while in Latvia decrease in unemploymentlevel was the smallest among Baltic countries despite thehighest GDP growth rate – only by one percentage pointfrom 17.1 per cent in the second quarter of 2011 to 16.1 percent in mid-2012.2/29
October 2012
Employment continues to grow
growth, in the first half of 2012 export growth rate slowedsubstantially and economy was supported by privateconsumption, the largest gross domestic product (GDP)component. Due to stronger than expected domesticdemand, the GDP growth rate of this year has beenrevised upwards in all three countries.
Unemployment rate* (%)
LatviaLithuaniaEstonia
*Persons aged 15-74Source: National Statistics
Slight unemployment changes in Latvia can be explained bya significant rise in the economic activity, e.g. decline innumber of discouraged workers (those persons who havelost hope to find a job or do not know where and how tofind a job). In Latvia number of discouraged workers in thesecond quarter was 25.4 thousand persons or 4.8 per centof the total number of inactive population. Number ofdiscouraged workers declined by 8.2 thousand compared tothe second quarter of 2011. In Estonia and Lithuanianumber of discouraged persons is smaller than in Latvia,forming approximately two per cent of the total number ofinactive population.Growing economic activity and gradually decliningunemployment rate reflects positive development in thelabour market. According to Labour Force survey, in Estoniaemployment grew by 3.6 per cent year-on-year in thesecond quarter of 2012. Latvia and Lithuania posted 2.2 percent and 1.4 per cent growth of employment respectively.Since its labor market bottomed in the first quarter of 2010,Estonia has recovered 70 thousand of the 109 thousand lost jobs. In Lithuania number of employed persons during thelast nine quarters has increased by 76 thousand. Due toadjustments in unemployment and employment figuresaccording to Population Census 2010, in Latvia it is muchharder to evaluate the number of recovered jobs. Comparedto the lowest point of 2010, employment has rebounded by12.7 per cent in Estonia and 5.7 per cent in Lithuania.Employment will rise further, albeit at a slower pace amidmoderate GDP growth.Unemployment rate is expected to decrease in the nearfuture in all Baltic countries, due to both job creation andemigration. According to forecasts, average unemploymentrate this year in Estonia will be 10.4 per cent while inLithuania and Latvia unemployment will make 13.5 and 15.6per cent of the economically active population respectively.Next year unemployment rate is expected to be 9.8 per centin Estonia, 12 per cent in Lithuania and 14.2 per cent inLatvia.
0%4%8%12%16%20%24%
   1   Q    0    7   2   Q    0    7   3   Q    0    7  4   Q    0    7   1   Q    0   8   2   Q    0   8   3   Q    0   8  4   Q    0   8   1   Q    0   9   2   Q    0   9   3   Q    0   9  4   Q    0   9   1   Q    1   0   2   Q    1   0   3   Q    1   0  4   Q    1   0   1   Q    1   1   2   Q    1   1   3   Q    1   1  4   Q    1   1
 
3/29
Wages in Estonia had the highest increase among theBaltic countries – in the last quarter wages grew by 6.3 percent compared to corresponding period of 2010. In Latviagross wages increased by 4.5 per cent and in Lithuania by2.5 per cent. Wage growth in Estonia during the last twoyears was faster than in Latvia and Lithuania, thusdifference between wages in Estonia and other Balticcountries increased. In Estonia average gross wages (EUR865) is by 28 per cent larger than in Latvia (EUR 676) andby 37 per cent higher than in Lithuania (EUR 630). Averagegross wages in Latvia is by 7 per cent higher than inLithuania; however due to larger tax wedge on the labournet monthly salaries in Latvia is the lowest among theBaltic countries. In the
first half
of
 
201
2
 
the
average netmonthly wage in Lithuania reached EUR 48
3
while inLatvia it was EUR 481.
Gradual growth of real income has resumed in Estonia andLatvia, while in Lithuania real wages remains on downwardtrend. The real wages in Estonia increased for the fourthquarter in a row, albeit, at a slower pace than in theprevious quarters. In the second quarter real wagesincreased 1.1 per cent year-on-year. In Latvia the averagereal wage in the second quarter rose by 1.5 per cent year-on-year thus improving purchasing power of labor force.
Average gross wages and salaries (%, YoY)
Source: National Statistics
LatviaLithuaniaEstonia
Real wages (%, YoY)
Source: National Statistics
LatviaLithuaniaEstonia
There is uneven wage growth across the different sectorsof economy. Besides, labor cost dynamics are influencedby irregular bonuses and premiums. In the second quarterof this year the irregular bonuses and premiums peremployee in Estonia grew by 19.9 per cent compared tothe 2nd quarter of 2011, influencing the growth of theaverage monthly gross wages. Increase of average grosswages (excluding irregular bonuses and premiums)reached 4.6 per cent.
Baltic Household OutlookOctober 2012
-15%-10%-5%0%5%10%15%20%25%30%
  1  Q   0  8  2  Q   0  8  3  Q   0  8  4  Q   0  8  1  Q   0  9  2  Q   0  9  3  Q   0  9  4  Q   0  9  1  Q   10  2  Q   10  3  Q   10  4  Q   10  1  Q   11  2  Q   11  3  Q   11  4  Q   11
234256261264235235216236305 305306291
150200250300350
4Q084Q094Q104Q11
Average old-age pensions (in euros)
Source: National Statistics
LatviaLithuaniaEstonia-12%-8%-4%0%4%8%12%
  2  Q   0  8  3  Q   0  8  4  Q   0  8  1  Q   0  9  2  Q   0  9  3  Q   0  9  4  Q   0  9  1  Q   1  0  2  Q   1  0  3  Q   1  0  4  Q   1  0  1  Q   1  1  2  Q   1  1  3  Q   1  1  4  Q   1  1  1  Q   1  2  2  Q   1  2
Since the first quarter of 2010 when wages in Estoniastarted to grow, average gross wages have grown by 19per cent. Taking into account consumer price movements,real wages have increased by 6.7 per cent. In Estoniahouseholds have experienced a quicker improvement inthe purchasing power than in Latvia and Lithuania. In realterms (deflated by the consumer price index), average netwages and salaries are approximately 7.5 per cent lowercompared to the second quarter of 2008. In Latvia sincethe lowest point of recession average gross and realwages have increased by 11 and 2.5 per cent respectively,however purchasing power of workers is far below pre-crises level. In the second quarter of 2012 average real netwage was 10.3 per cent lower compared to the sameperiod of 2008. Among Baltic countries Lithuanianhouseholds have gone through the largest decline in theirincome level -- real net wages fell by 14.3 per centbetween the second quarter of 2008 and the samequarter of this year.It is expected that labour income will rise gradually. InLatvia approved Personal income tax cuts (from 25 to 24per cent in 2013 etc.) are expected to support privateconsumption next year. According to forecasts, in Latviaincrease of average gross wages next year will reach 4 to 5per cent. In Lithuania wage growth is expected lower thanin Latvia and Estonia, reaching 2.5 per cent.

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