SEB bank: Recovery in household finances on track but uncertainty remains
Economic growth has led to an increase in employment and real wages in Estonia and Latvia. The earnings abroad and remittances have added significant amount of funds to the households' disposable income in all three countries. Nevertheless despite the improvement of situation, the modest consumer confidence in Estonia eliminating the large gap between Estonia and other Baltic countries, supports the strengthening of the households' balance sheets reflecting in the largest savings of Estonian households, while in Latvia and Lithuania deposits dropped. However demographic situation with low birth rate, population ageing and emigration involves potential long term problems of all Baltic countries with the financing of pension and social system. Under such circumstances the mandatory pension scheme and voluntary private pensions plays a more significant role and can ensure a larger financial security in retirement. These are key findings arising from the newest SEB Baltic Household Outlook.
Compared to 2010 when the labour market of the Baltic States experienced the lowest employment level, the number of employed people in all three Baltic States has increased, rebounding by 11 per cent in Estonia, 7.7 per cent in Latvia and 5.9 per cent in Lithuania. Although the employment rate has increased, it is nevertheless much lower than before the crisis – the current employment rate in Latvia and Lithuania can be compared to the rate in 2002–2003.
SEB Bank Household Economist Edmunds Rudzitis: "Year 2011 was very successful for economic growth in the Baltic States, and, as a result, they were the fastest growing economies in the European Union. The strong economic growth together with external demand and internal consumption promoted investments and had a positive impact on the labour market. In 2011, the number of employed people increased in all three Baltic States – in Estonia, the employment rate increased by 6.7 percents, whereas in Lithuania and Latvia it increased by 3.1 and 2 percents, respectively." According to Rudzitis unemployment rate which decreased in all Baltic countries this year will shrink further stabilizing at 14 per cent level in Latvia and Lithuania, but in Estonia labour market dynamics will be less positive.
After a decline in 2008-2010, real wages have been recovering in Latvia and Estonia, while Lithuanians' real earnings have decreased already for twelve quarters. Compared to 2010, in Latvia the real wages have increased by 0.1 % year-on-year showing an increase of 0.6 % in the last quarter of 2011, while in Estonia the real wages increased by 2.1 % in the last quarter of the previous year showing an increase for the second successive quarter and thereby stopping the real wage decline that had lasted for 11 quarters in Estonia. In the meantime, the real wages of employed persons in Lithuania continued to decrease for the twelfth successive quarter — if comparing the last quarter of 2011 to the same period of the previous year, the real wages decreased by 1.5 %. However, due to the higher tax burden the wage after tax deductions in Latvia still remains one of the lowest among all Baltic States.
Albeit Estonian households still have higher confidence levels than the EU average, the large gap between consumer confidence in Estonia and other Baltic countries disappeared in 2011. The confidence of Latvian and Lithuanian households has been comparable to the EU average: in March 2012 it was -18.1 in Latvia and -21.3 in Lithuania.
SEB Estonia Household Expert Triin Messimas: "Although the earnings of the households and employment are increasing, the modest consumer confidence can be explained by the downward adjusted economic prospects in the Baltic countries induced by the development of debt crisis in Europe".
Households' balance sheets
Modest consumer confidence in Estonia supports the strengthening of the households' balance sheets - households in Estonia have accumulated the largest savings and they also have the highest level of loans per capita, whereas in Lithuania the lowest loan-to-deposit ratio was identified: the value of savings per capita is higher than loans per capita. The Latvian households have the lowest level of deposits in financial institutions, however it may not be said about the loans per.
SEB Lithuania Household Economist Julita Varanauskiene: "We also can see that during the second half year, the volume of deposits from the households in financial institutions in Estonia grew by 4.6 per cent, while in Latvia and Lithuania dropped by 0.5 and 2.2 per cent, respectively. However it is clear that not every private individual accumulates savings. If deposits in financial institutions are divided only by a certain number of people that accumulated deposits, there are relatively less depositors in Latvia than in Lithuania or Estonia, but these depositors have accumulated significantly higher amounts."
Depopulation and ageing
Population decline and population ageing will have a negative impact on sustainability of pension system and labour markets. Over the next ten years the number of working age people could decrease by approximately 10 per cent in Latvia and by 8 per cent in Estonia and Lithuania.
Due to the economic crisis and social budget deficit widening, II pension pillar scheme assets are growing at a slower pace. In the second half of 2011, in Estonia 2nd tier funds value per customer was EUR 1600, while in Lithuania and Latvia, value per customer was about 30 per cent lower -- EUR 1110 and EUR 1080 respectively.
SEB Bank Household Economist Edmunds Rudzitis: "If contributions to the pillar II scheme and inflows to the pillar III pension remain at the current low levels future pensioners could experience a sharp drop in their life standards therefore it is important to support long-term savings through tax policy and increase contributions to the pillar II pension scheme".