Slowdown in wages growth as a consequence of the deteriorated economic situation

In September 2012, real wages decreased compared with August for the first time since January. Macroeconomic indicators show an economic slowdown. Further unjustified wage growth may result in deteriorated economic situation and repeated mistakes of the past.

On October 23, 2012 Ministry of Statistics released data on wages in September 2012.

In June 2012 an essential condition for a balanced economy has been breached: labour productivity growth rate was lower than the wages growth rate. By August, the labor productivity in GDP came to 104.7% compared with January-August 2011, and real wages – 113.3% over the same period.

In August 2012, due to a coincidence of several negative factors, the economic situation deteriorated substantially. Economy’s net profit has decreased by BYR 2.8 trillion. Exports dropped significantly due to maintenance works at the refinery, suspension of ‘lubricant’ schemes and the lack of contracts with China and India for the potash supply. Preliminary data shows, that the situation has not improved in September.

In September Belarus’ currency payments were negative and came to USD -505.2 million. Deteriorating situation in foreign trade resulted in increased devaluation risks. In these conditions, the National Bank has resorted to tighter monetary policy. As a result, there has been a sharp increase in interest rates in the interbank market and this trend has been translated on loan agreements with enterprises.

The share of loans in the real economy is high. Many businesses use credit lines because of low margins and high turnover period. Loans are often used to pay salaries and therefore increase production costs.

With high interest rates and enterprises’ decreased efficiency, continued waged growth will result in washing-out of enterprise’s resources and deterioration of their financial condition. The optimal solution would be wages moderation and some adjustment/reduction, which was the case in some regions in the country.

Thus, further wage growth is only possible if economic efficiency improves, which is unlikely in the current circumstances. Administrative wage growth is undesirable and will result in increased negative trends in the economy. The alternative would be to abandon the principle of jobs preservation at all costs, reducing the number of employees and their reorientation for industries which lack labour resources.