Projections of Lithuanian Economic Indicators (September 2011)

Vilnius, September 9. Growth of exports of Lithuanian goods accelerated very rapidly over the past months despite weakened confidence in export market growth prospects, therefore, the central economic development scenario updated by the Ministry of Finance foresees unchanged growth of gross domestic product in 2011 – 5.8%. Although European Union (hereinafter – 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 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 sufficient production capacities ensuring  the growth of 4.7% of GDP in 2012. 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, in 2013–2014 GDP growth will decelerate to 3.7 % and 3.4 %, accordingly. The growth prospects for 2012 – 2014 will be adjusted as soon as more data on the management of global and regional economic risks is received.

The export growth indicators for 2010 were markedly affected by strong export decline that took place in 2009 (in 2009 exports decreased by 26.6%) and by the increased prices for raw materials and produce. Consequently, already in October 2010 the highest export volumes reached before the crisis were exceeded, and in 2010 annual exports growth accounted for 32.7 %. Due to continuous external demand growth, in the 1^st half of 2011 export volumes kept further increasing, however despite impressive annual growth indicators (in the 1^st quarter of the current year, as compared to the 1^st quarter of 2010, exports grew by 50.1 %, and in the 1^st half of the current year, as compared to the same period of the previous year, – 41.2 %, while the annual growth in all groups of goods, with the exception of several ones, the general share of total exports of which made up less than 0.3 %, represented at least 20 %) the growth deceleration was appreciable: considering seasonality in the 1^st quarter of the current year, as compared to the previous quarter, exports grew by 8.4 %, and in the 2^nd quarter, as compared to the 1^st quarter, – 1.4 %.

Table 1

Source: Calculations made by the Ministry of Finance based on the data by the Statistics Lithuania.

Source: Calculations made by the Ministry of Finance based on the data by the Statistics Lithuania.

Exports of mineral products constituting the major share of exports in the 1st half of 2011,  as compared to the 1st half of 2010, increased by 43.5 % (and its contribution to annual total export growth represented 10.5 percentage point), exports of chemical industry produce – 63.4 % (5.2 percentage point), exports of transport means – 59.8 % (5.1 percentage point), exports of metals and cars – 40.6 % (5.8 percentage point), exports of produce of vegetative and animal origin – 50.0 % (4.7 percentage point).

Export changes, considering the seasonal impact, over the past quarters, with the exception of the 2^nd quarter of 2011, were positive and considerable; therefore, even taking into consideration the data for the 2^nd quarter of 2011, deviating from the general trend, a large export growth is anticipated for the year 2011. Having estimated the current available data, even if total export volumes of goods (considering the seasonal impact) would remain at the level of June of 2011, in 2011 export growth would be 29 %, 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 about one percentage point more rapidly than it is planned in the central economic development scenario.

Export growth increases production capacity utilisation, profitability and improves 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 keep growing. The investments into fixed capital at comparative prices in the 1^st half of 2011 grew by 30 %, as compared to a relevant period of 2010. In the 2^nd quarter of 2011the growth of all main types of fixed assets was observed (other constructions grew by 11.1 %, machinery and equipment – 56 %), housing construction revived in the 1^st quarter kept growing – 14.7 %. In medium term, the investment demand will be enhanced by used production capacities; the investment environment will be improved by labour costs decreased during the recession and more favourable borrowing conditions.

Export development, investments and demand for labour force create conditions for strengthening consumers’ confidence and consumption growth. The final consumption growth of 4.8 % was recorded in the 1^st half of 2011, while household consumption expenditure (at comparative prices) during the same period increased by 6.1 %. Private sector debt limited and still will limit consumption financing possibilities, however growing income and residents’ deposits accumulated at the end of the crisis make conditions for a rational private consumption growth in 2011:  current inflation exceeds interest on deposits, therefore, the incentives to consume instead of saving for the future increase. After enhanced employment and under more rapid growth of salaries in 2012, 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 decreasing towards the levels pressing up the salary growth. Though unemployment rate still remains high (in the 4^th quarter of 2010 – 17.1 %, in the 1^st quarter of 2011– 17.2 %, in the 2^nd quarter of 2011– 15.6 %), employment and job vacancies indicators in the 1^st half of 2011 demonstrate that the break in the labour market cycle which occurred in the previous year is stable – a Beveridge curve  sustained the direction of changes. Thus, new job vacancies are rapidly occupied and either economy or individuals searching for a job should not suffer big losses due to job vacancies unoccupied for a long period of time. Besides, the highest activity of the labour force during the last 12 years (in the 2^nd quarter of 2011 this indicator in the group of people aged 15-64 years grew up to 72.3 %) apparently denies the public myth that the basic reason for unemployment decline is the labour force leaving the country. Such currently in Lithuania observed 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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Source: Data by the Statistics Lithuania.

The turnaround of the Beveridge curve in Lithuania was caused by increased supply of job vacancies and a higher employment rate. In the 1^st half of the current year, as compared to the half of the previous year, the number of job vacancies in Lithuania grew 60 %. This demonstrates the shift of national economic cycle phase and signals the end of recession in labour market. According to the Statistics Lithuania, in the 1^st half of the current year, as compared to the same period of the previous year, the average number of the employed increased by 2.6 % (in the 2^nd quarter of the current year, as compared to the 2^nd quarter of 2010, – 4.3 %). The major contribution to the increase in total number of the employed – 1.1 percentage point – was made by transport and storage operations, where in the 1^st half of the year the number of the employed over the year increased by 16.3 %. Information and communication activities, professional career, research and development, where the number of the employed grew 26.7 % and 10 %, accordingly, contributed 0.4 percentage point each to the increase in the number of the employed; 0.3 percentage point – accommodation and catering service activities, where in the 1^st half of the year the number of the employed increased by 12.9 %. In the 1^st half of the year the average number of the employed in the manufacturing industry over the year increased by 1.6 % (in the 2^nd quarter, as compared to the 2^nd quarter of 2010, – 2.9 %), in construction sector grew – -0.1 % (in the 2^nd quarter, as compared to the 2^nd quarter of 2010, – 0.2 %), retail and wholesale trade – -0.2 % (in the 2^ndquarter, as compared to the 2^nd quarter of 2010, – 0.3 %).

The outcomes of the business trend surveys on expected number of employees published by the Statistics Lithuania demonstrate that the employers are ready to increase further the number of the employees. Based on August’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 remain positive.

Taking into consideration a higher than expected activeness of population of working age in search for a job, it shall be adjusted that the unemployment rate in 2011 will diminish at less accelerated pace and will represent 15.2 %, while in 2012–2014 it will consistently decline, and will account for 11.9 %, 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. Despite the economic recovery, the unemployment rate will remain quite high over the entire medium term.

The data for 2011 concerning the increase in the prices for food products, housing, water, energy, gas and other fuel group, as well as transport goods and services shows that this year the annual average HICP inflation will be more rapid by about 1 percentage point and will account for 4.5 %.The increased annual core inflation rate up to 3 % in July gives a signal about the intensifying pressure of consumption on prices. Therefore, in near future, under further reasonable consumption recovery, however under decline of impact of external factors on prices, the annual average inflation rate will stabilise, and start diminishing at the beginning of 2012. In 2012–2014, under different factors, the annual average inflation should remain to be stable – about 3.4 % –3.5 %. On the other hand, under ongoing uncertainty in global economy, the risk of effect of shifting global prices for energy goods and raw materials on the consumer price index in Lithuania remains.

Taking into consideration the results of the 1^st and 2^nd quarters of the current year, the average salary projection for 2011 is adjusted by LTL 13 down to LTL 2,051. More accelerated salary growth is probable in 2014 after decrease in labour force supply and conclusive recovery of investment financing from borrowed funds: then the salary growth is likely to be about 7.9 %.

Realisation of the central economic development scenario and positive risks requires investors’ confidence in the Lithuanian economic development stability and the entire euro zone prospects; therefore, the scenario implementation depends on prudent budget and tax policy planning and execution in 2011–2012 in Lithuania and other EU Member States.

A Beveridge curve, showing labour market status, acquired the reputation of a reliable preliminary indicator when was the first to inform about the upcoming economic recession. Changes in the Beveridge curve at the end of 2007 were the first preliminary data reliably warning about the break in economic cycle and upcoming start of the recession in Lithuania, as well as in other Baltic States.