Purchasing power increased by almost 10 pct

• Wage growth accelerated further in the first quarter.
• A surge in purchasing power supports consumption but hurts enterprises’ profitability.

In the 1st quarter of 2016, the average monthly gross wage was 1,091 euros in Estonia, up by 8.1% over the year. Net average wage grew even faster, by 8.7% in real terms, due to a decline in consumer prices and a higher tax free income. The growth of gross wages will probably remain fast in the remaining months of the year.

The rapid growth in average wage is supported by a lack of suitable labour, a 10% increase in minimum wage, a political agreement to raise the wages of teachers and healthcare workers, and strong domestic consumption that lifts the sales of enterprises selling their products and services in the domestic market. A surge in irregular bonuses and premiums (+32.5% per employee over the year) added 0.8 percentage point to average gross wage growth. Irregular bonuses and premiums increased substantially among the enterprises of real estate activities and labour rental companies.

Average gross wage increased in almost all sectors. Wage growth was fast at both ends of the wage spectrum: in the sectors of lower wages like tourism, entertainment, and real estate activities, but also at the other end of the wage scale like finance and IT. Lower oil prices resulted in a lower wage growth in the sectors of energy and mining.

Rapid wage growth supports economic growth while exports remain weak. In the first quarter of 2016, retail sales volumes increased by 6%, while the volumes of exports of goods decreased by 2%, over the year. In the longer term, too fast growth of wages increases macroeconomic risks as too fast growth in unit labour costs could result in lower exports, investments and profitability, which means smaller buffers for potential negative shocks.

Source: Swedbank

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