Projections of Lithuanian Economic Indicators (March 2011)

Vilnius, March 16. Growth of exports of Lithuanian goods accelerated very rapidly over the past months, and the growth prospects of the export markets remain positive, therefore, the updated central economic development scenario foresees substantially more accelerated growth of gross domestic product in 2011 – about 5.8%. Although EU economic growth prospects remain risky, the economic management policies pursued by the European Central Bank and EU Member States allows having expectations that positive prerequisites for the Lithuanian economic growth will continue to be formed at an accelerated pace for the period of 2012 – 2014 also: investment recovery which became obvious in the 3^rd quarter of 2010 will also continue in 2011 – 2012, and will allow building of sufficient production capacities ensuring  the growth of 4.7% of GDP in2012. Given the currently formed EU assistance absorption plans of the Financial Perspective for 2007–2013, and the decrease in labour force due to ageing population, GDP growth will decelerate to 3.7 – 3.4 % in 2013–2014. The growth prospects for 2013 – 2014 will be adjusted as soon as more data on the management of global and regional economic risks is received.

Whereas the main reason for economic recovery is the rapid export and investment growth, taking into consideration the national public finance revenue structure (the greatest share of revenue generated from consumption taxes that are not applied either to exports, or to investments), their impact on the State budget revenue is considerably lower than that on GDP growth. Aiming at securing faster debt stabilization at a lower level, following the Law on Fiscal Discipline, over-the-target revenue should be allocated to the reduction of public finance deficit, and at the same time – to that of borrowing requirement. Inthe Convergence Programme being updated, it will be proposed to reduce the deficit below 5.3% of GDP in 2011. Lithuania has undertaken to implement the EU Council Recommendation that after acceleration of economic development, the general government finance deficit will be reduced at a more accelerated pace.

Having estimated the current available data, even if total export volumes of goods (considering the seasonal impact) would remain at the level of January of 2011, in 2011 export growth would be almost 28 %, still, in the cautious central economic development scenario, the growth of only 21.7 % in goods and services is projected. Therefore, there is a positive risk that in the event the export acceleration rates remains the same, this year gross domestic product will grow by several percentage points more rapidly than it is planned in the central economic development scenario.

The export growth indicators for 2010 were markedly affected by strong export decline that took place a year ago (in 2009 exports decreased by 26.6%), and by the increased prices for materials and produce, however, even not taking into consideration the regain of markets in 2010 that were temporarily lost in  2008–2009 due to the crisis, the trends of monthly changes (considering the seasonal impact) continue to show strong growth – in the 4^th quarter of 2010 exports grew by 19.9%, or  averagely by  7.9% per month. In October 2010 the highest export volumes reached before the crisis were exceeded.

Export growth is observed in all groups of goods comprising at least 0.5% of total exports. In 2010, as compared to 2009, exports of produce of each group of goods (with an exception of several ones, the general share of total exports of which made up less than 0.5%) grew at least by 18%. The annual exports of mineral products,  as compared to 2009, increased by approximately 45%. Exports of ready-made foodstuffs, plastics and rubber products, industrial goods, chemical industry produce of Lithuanian origin together made 29.3% of total exports of Lithuanian origin, and, as compared to 2009, increased by 20.5 %.Car export, as compared to 2009, grew 40 %, while that of Lithuanian origin – 29 %. In 2010 export of transport means increased by 42 %, while that of Lithuania origin – almost by 28 %.

Export growth increased capacity utilisation, profitability of production and improved credit solvency of national enterprises, therefore, positive investment trends that started in the 2^nd quarter of 2010 and became evident in the 3^rd quarter should strengthen. Gross capital formation decreasing for nine quarters in run, increased by 15.0 % in the 3^rd quarter of 2010, while in the 4^th quarter – by 13.9 %. The growth in the 4^th quarter was observed by all types of material investment (other constructions grew 24.5 %, machinery and equipment – 10.5 %, transport means – 218.8 %), with exception of housing construction. In medium term, the investment demand will be enhanced by needs for new production capacities; the investment environment will be improved by labour costs slightly changing since the recession and more favourable borrowing conditions.

Export development, investments and demand for labour create conditions for strengthening consumers’ confidence and consumption growth. After decrease in final consumption for eight quarters in run, the growth of 1.4 % was recorded in the 4^th quarter of 2010, while household consumption expenses surged by 3.3 % during the same period. Though final consumption expenses were still diminishing (3.8 %) in 2010, however at significantly lower pace than in 2009. Private sector debt limited and still will limit consumption financing possibilities, however growing income and deposits accumulated at the end of the crisis will make conditions for a rational private consumption growth in 2011:  current inflation exceeds interest on deposits, therefore, the incentives increase to consume instead of saving for the future. In 2012 after enhanced employment and under more rapid growth of salaries, the consumption will grow at a more accelerated pace than GDP.

It is planned that in export growth and under functioning single EU labour market, a huge unemployment will be rapidly decreasing towards the levels pressing up the salary growth. Though unemployment rate remained high (in the 4^th quarter of 2010 – 17.1 %), employment and vacancies indicators in the 2^ndhalf of 2010 demonstrate that Lithuania faced the break in the labour market cycle – a Beveridge curve changed the direction. Such early upturn in labour market is unusual, as labour market indicators usually start improving only after two years from the start of the gross domestic product growth.

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The turnaround of the Beveridge curve in Lithuania was caused by increased supply of job positions and a higher employment rate. In the 2^nd half of the current year, as compared to the previous half of the year, the number of vacancies in Lithuania grew 17.4 %. This demonstrates the shift of national economic cycle phase and signals the end of recession in labour market. As compared to the 1^st half of the year 2010, the employment rate (without considering seasonality) in the 2^nd half of 2010 in Lithuania increased 2.1 percentage points and represented 58.9 %. The number of the employed in the manufacturing industry was not decreasing since the 2^nd quarter of 2010. The number of the employed in construction sector grew 10.1 %, information and communication activities – 29.8 %, education – 2.7 %, health and social labour activities – 4.0 %, electricity, gas, steam supply and air conditioning activities – 23.1 %, accommodation and catering service activities – 1.8 % in the  2^nd half of the year.

The outcomes of the business trend surveys on expected number of employees published by Statistics Lithuania demonstrate extremely positive expectations. Based on February’s business trend surveys on expected number of employees, it is planned that in upcoming months the hiring trends of aggregated industrial, construction, retail trade and service employees will be the highest since August of 2008.

Taking into consideration that the labour market of the three Baltic States is developing quite similar or with a short delay, an accelerated growth of the employment and decline in the unemployment are announced by the unemployment rate in Estonia: in the 4^th quarter of 2010 in Estonia the unemployment decreased to the rate, which was in the 2^nd quarter of 2009 and represented 13.5%, while as compared to the 1^st quarter of 2010, there was a 6.2 percentage point decline.

Despite the economic recovery, the unemployment rate will remain quite high over the medium term. It is envisaged that in 2011 the unemployment rate will decrease to 14.9%, while in 2012–2014 it will consistently decline, and will account for 11.5%, 9.3% and 7.8%, accordingly. It is difficult to make an accurate assessment of the changes in emigration flows and their impact on the decline in the unemployment rate, as from April 2010 the emigrants’ aim to legalise their departure increased significantly due to the obligation of a permanent resident of the country to pay compulsory health insurance contributions established in the Republic of Lithuania Law on Health Insurance.

In 2011–2014 the increase in consumer prices will largely take place due to the changes in the same groups of goods, where the prices were decreasing at the beginning of the recession. The middle of 2008 was the start for slowdown in the annual inflation rate based on the Harmonised Index of Consumer Prices (hereinafter referred to as the HICP), when there was a decline in global prices for raw food materials and energy, and it reached the lowest value in February 2010, when it accounted for -0.6%. Deflation lasted for a comparatively short time – just for the 1^st quarter of 2010, when the greatest annual decrease in the prices for food products and transport goods as well as services was fixed. A great influence was also made by the prices for housing services, which decreased due to the lower prices for natural gas (as compared to the prices a year ago). The changes in the prices in these three price index groups in 2010 predetermined about a half of all HICP fluctuations.

During the crisis period the decreased global prices for energy and food products in Lithuania were also under the pressure of the decreasing earnings and purchasing power of consumers, net inflation (calculated excluding the prices for energy goods and unprocessed food products) was under significant deceleration – in February and March 2010 it represented -0.7%, and, on the contrary to HICP inflation, it remained quite stable till the end of the year: in November it accounted for 0.0%, and just in December it jumped to 0.6%, while over the first two months of the current year it went up just by 0.1 percentage points, and in February it represented 0.8%. The increased net inflation rate gives a signal about the intensifying pressure of consumption on prices. In spite of that, at the moment a more significant (over 1%) annual growth in prices is observed just in the aforementioned three largest groups of goods and services.

In the nearest future, while recovery of consumption is to be moderate, the general price level will be largely further determined by external factors – high prices for raw food materials and energy. On the other hand, although international organisations forecast that in the future the prices for raw food materials and energy will remain high, there is positive risk that in the nearest years due to the effect of the statistical base their increase will be weaker. As the exports will further grow at a great pace, and the economic recovery will spread to other sectors, in length of time the earnings will inevitably start growing. The average earnings projection for 2011 was increased by LTL 61 up to LTL 2,064, while the projection for 2013 was increased by LTL 188 up to LTL 2,334. The most accelerated growth in the average earnings is credible to be in 2014, after the supply of labour force decreases, and there is full recovery of investment financing from borrowed funds: then it is possible to expect about 7.8% growth in the earnings.

The strengthened purchasing power of consumers will also make a greater contribution to the increase in the general price level in subsequent years. In 2011–2014 period, under the influence of different factors, the average annual consumer inflation should remain stable – about 3.3%.

Realisation of the central economic development scenario and positive risks requires investors’ confidence in the Lithuanian economic development stability; therefore, the scenario implementation depends on prudent budget and tax policy planning and execution in 2011–2012: accelerated budget deficit reduction and prevention of structural external imbalance risk, which was nominated in the 2010 European Commission study.