‘Has the tightening of labor markets translated into wage pressures?’

Wage growth increases gradually, should give boost to consumption this year

Croatia: Wage pressures remain fairly weak, as wages continued to grow below 2% y/y in 2016, suggesting only modest acceleration compared to 2015. Given that, following a long recession, the economy is still in a fairly early phase of recovery (as is the labor market), we see only modest wage pressures in the mid run. A one-off in 2017 should come from wage hikes in the public sector, and in the mid-run from the ongoing labor market recovery, driven not only by increasing employment, but also emigration trends that are making the labor supply scarcer.

Czech Republic: The labor market remains strong in the Czech economy. The seasonally-adjusted unemployment rate is currently below 4%, which means that the possibility of it falling further is very limited. As domestic and foreign demand are still solid, the favorable economic developments spill over into higher wages and then into inflation pressure. This development will continue in this and the next year. In nominal terms, we expect wage growth to arrive at 4.4% in 2016, 4.6% in 2017 and 4.9% in 2018.

Hungary: Wage pressure has already materialized in Hungary, as the nominal wage increase has accelerated substantially over the course of 2016, thanks to the tightening of the domestic labor market. In the period between January and November, the average gross wage growth rate reached 6.6% y/y, while net wages rose by 8.2% on average, due to the 1ppt PIT decrease and the loosening conditions of the family tax credit. Since the unemployment rate dropped to 4.5% by end-2016, very close to the level of full employment, while the general minimum wage was raised by 15%, and the minimum wage for qualified workers with a trade was increased by 25% this year, wage dynamics should accelerate even further this year, bolstering GDP growth via strengthening household consumption. We believe that the wage pressure should translate into consumer price inflation; we expect a material impact on consumer prices at the earliest at end-2017/early-2018.

Poland: Labor market conditions have been continuously improving over the course of the last year. Employment grew 3% on average and the unemployment rate dropped to the historically low rate of 8.2%. Despite the tightening labor market, wage growth accelerated in comparison to 2015, but overall growth dynamics remained relatively moderate, averaging 4.1% last year, with increasing immigration from Ukraine likely a factor mitigating any more pronounced wage increase. This year, the nominal wage should maintain similar growth dynamics; however, real wage growth is likely to be weaker, due to the increasing inflation rate.

Romania: As economic growth gained speed in 2016, Romania began to feel the squeeze of a tightening labor market, with unemployment falling to 6% last year, from 6.8% in 2015. Although Romania has been faced with a chronic workforce shortage for years (more than 2mn citizens are working abroad), this weakness burst forth recently, when the economy not only closed the gap on its potential, but is now rising above it. The insufficient work force, coupled with repeated hikes in the public pay scale and negative inflation, pushed the real wage up almost 15% in 2016.

Serbia: Although we have seen a notable improvement on the labor market, with the average 1-3Q16 unemployment rate moving to 16%, from 17.6% in the same period last year, real wages in the economy recorded a relatively mild increase, with the Jan-Nov16 figure standing at 2.6% y/y. However, to get a clearer view, we looked at the wage dynamics across the sectors, which showed that the private sector (manufacturing and services) recorded solid 5% y/y real growth on average, while public sector wages (administration, education and health) stagnated or even recorded negative real growth. Thus, we can say that economic recovery and tightening of the labor market led to an increase of cost side pressures in the private sector, while the public sector reflected the effects of consolidation measures (cuts in public wages in 2015). Looking forward, for 2017, we expect to see a continuation of upside pressures in the private sector, given the expected acceleration of the growth momentum, while public wages should also post stronger growth, as January 2017 brought 2-4% wage hikes in that sector.

Slovakia: The labor market has seen a sustained improvement in recent years. Employment growth accelerated, helping to bring down the unemployment rate. Real wage growth sped up accordingly, reaching 4.2% in 2014 and overshadowing nominal growth, due to mild deflation - a trend that continued throughout 2015-16. However, real wages grew at a slower rate in 2015 (3.2%) before reaching 3.7% on average during 1-3Q16. The tightening labor market is likely to exert wage pressures only gradually and unevenly across the sectors. Whereas some industrial sectors are already reporting shortages of skilled labor, others do not have this problem. Furthermore, the high number of long-term unemployed persists. Overall, we expect real wage growth at 3.4% and nominal growth at 4.1% this year.

Slovenia: The restored growth momentum and steady unemployment rate decline supported some wage acceleration in 2016, though on the 12M basis we are still below 2% y/y, i.e. fairly modest. Looking down the road, we see room for some acceleration, as the above-mentioned factors are anticipated to remain in place. Stronger wage inflation, on the other hand, remains limited by fairly high labor costs.

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