Domestic consumption remains one of the main drivers of economic growth in the Baltics. However, in the final months of the year, annual retail sales growth in euro terms has slowed slightly from 6-8% in the first half of 2019 to 4-5% in the last months of the year. Growth rates have declined most rapidly in Latvia, partly due to the decline in alcohol sales following the reduction of excise duty rates in Estonia. At the same time, consumer sentiment remains very strong, unemployment in the Baltics is declining and average wages in the Baltics have risen by about 8% in 2019. Consumer price inflation is also moderate within the range of 2-3%.
So far, the slower economic growth in Latvia and the deterioration of business sentiment in the Baltics have not had a significant impact on the labour market and wage growth has remained at the level of previous years. However, in recent months, the Baltics have seen a slight decline in employment expectations in industry and construction, suggesting that decline in unemployment will be slower in 2020 than before, and thus wage growth in the Baltics could slow down somewhat.
At the same time, demography and shrinking of working-age population remains a major challenge for employers, and wage pressures will certainly continue. However, with 2-3% economic growth, more than 8% wage growth is definitely unsustainable. This issue is particularly acute in sectors where the age of the workforce is noticeably above average, such as healthcare, as well as part of the manufacturing, and where generational change is needed. It is also a major challenge for low-wage exporters, as global competition severely limits an entrepreneur's ability to pass wage increases onto consumers and clients. Entrepreneurs will therefore increasingly have to think about additional investments in productivity.
However, not all domestic consumption continues to grow, and in the Baltics, construction growth has slowed significantly in 2019, albeit to a large extent due to fluctuations in the absorption cycle of EU funds while private sector demand remains strong. This is also evidenced by the relatively rapid rise in real estate prices in the Baltics, but the price-earnings ratio remains historically low compared to wages. With the EU fund investment cycle slowing down in 2020, growth in the construction sector in the Baltics is likely to be lower than the overall economic growth rate. However, construction volumes are still high and slower growth is to some extent desirable as the industry is already close to overheating.