Projections of Lithuanian Economic Indicators (September 2012)

Vilnius, September 7. The Ministry of Finance, after evaluation of Lithuanian economic development of the first half of 2012 and formed trends, had not found essential changes in medium-term economic development scenario for 2012.

Economic slowdown in the EU and eurozone in the first half of 2012 had not a substantial effect neither on Lithuanian exports nor on domestic demand. Lithuania has very limited economic ties with problematic Southern European countries – in the first half it exported about 3 per cent of total exported goods to the so called “PIIGS countries”. The main partners of Lithuanian exports is Russia and EU Member States the economy of which, despite EU and eurozone recession recorded in the second quarter, keeps growing at rather accelerated pace (Latvia, Germany, Estonia, Poland, Scandinavian countries). To the EU countries currently facing recession – the United Kingdom and Netherlands, Lithuania exported about 12 per cent of total exported goods.

Decreased economic evaluation and consumers’ confidence indicators recorded in July and August signal about a slower economic development in the second half of 2012, what is in line with the medium-term economic development scenario formed in April. We project that due to unfavourable external environmental conditions, Lithuanian GDP for 2012 will grow at a slower pace than in 2011 – 2.5 per cent.

Recovering labour market, increasing income of residents, optimistic consumers’ expectations,  successful EU financial assistance absorption and low interest rates in the first half of 2012 created favourable conditions for domestic demand growth: in the first half of 2012 household consumption grew 5.9 per cent, while gross fixed capital formation –  4 per cent. The major investments were made to manufacturing industry, transport, real estate, retail sale and wholesale sectors. Declining expectations of economic participants will slow down the domestic demand growth in the second half of 2012, therefore, annual results should be more moderate. After the presumption about the external environmental recovery in 2013 come true, the effect of domestic demand on GDP growth in medium-term should increase. Due to demand for further consolidation of public finances, general government consumption will remain reasonable in medium-term.

Based on 2012 Spring Forecast of the European Commission, we think that after recovery of external demand in 2013, Lithuanian  GDP may grow by 3 per cent, and considering currently formed EU assistance absorption plans under the 2007–2013 financial perspective and decreasing manpower due to population ageing, GDP growth in 2014–2015 may reach 3.4 and 4.3 per cents, accordingly. Taking into consideration lower GDP growth in 2013 than it was envisaged in April, it is planned to generate less tax revenue, therefore, even without increasing expenditure plans the Government will be suggested to correct general government deficit reduction tasks: to reduce general government deficit at least to 2.5 per cent of GDP in 2013 – following minimum requirements of the Stability and Growth Pact to reduce deficit at least by 0.5 per cent of GDP, and in 2014 –  at least to 1.5 per cent of GDP, in 2015 – at least to 0.5 per cent of GDP, in pursuit of balanced public finances in medium-term, as it is required by the Law on Fiscal Discipline. Specific deficit tasks in 2014-2015 will be established by updating the 2013 Convergence Programme.  

In near future, until the consumption recovery is moderate, and the impact of prices of external factors – food stocks and energy – will remain moderate, annual and average annual inflation rate will decrease, and at the end of 2012 it will not exceed 3 per cent. Despite that, there is a risk that due to various external reasons, oil price will grow at a more accelerated pace than projected in the 2012 Spring Forecast of the European Commission, and it would negatively affect the prices of different goods and services in Lithuania.  Besides, under constant growth of food demand in the world, the decrease in prices of food stocks and production is possible only under favourable natural conditions for the crops. Therefore, the increase in prices of food stocks in medium-term is also attributed to a higher inflation risk. The impact of prices of food stocks and energy on Lithuanian inflation would be higher than in the developed countries due to a larger share of the consumer basket linked to these prices. On the other side, though international institutions project that in the future the prices of food stocks and energy will remain high, there is a positive risk that the high prices reached will grow at a more moderate pace in the near future.

Following decelerated export growth in 2012, wages will grow at a slightly slower pace than in 2011. Subsequently, after recovery of foreign demand and under further decrease in manpower resources in the country,  wages will inevitably start growing at a more accelerated pace. Increasing consumer purchasing power will also promote the rise of overall price level in the subsequent years. It is projected that during 2012–2015 the average annual inflation will fluctuate within the limits of 3.0–3.5 per cent.

In 2011 the unemployment rate represented 15.4 per cent and in average, was by 2.4 percentage point lower than a year ago, while the decrease in unemployment  was one of the most rapid one in the European Union. This was caused by the increased number of the employed by 2 per cent and decreased number of the unemployed by 14.5 per cent. Though the unemployment rate in the first half of 2012 was still high and reached 13.9 per cent, over the year (as compared to the first half of 2011) it decreased by 2.5 percentage point. During the first half of the current year, as compared to the first half of the previous year, the recorded number of the unemployed was by 16.4 per cent lower and the number of the employed increased by 1.6 per cent. During the second quarter of the current year the employment rate (in 15-64 age group) reached 62.9 per cent and was the highest during the last 3.5 years.

Despite increased uncertainty about EU economic perspectives, in the first half of 2012 the results of business trends surveys on the expected number of employees in the upcoming 2–3 months again became positive (a larger part of the surveyed planned to increase the number of employees rather than to decrease), while in May and June even exceeded the results of the respective months of the last year. In part, it accounts for a rapid decrease in the unemployment rate in the first half of the year. Though the results of business trends surveys in July and August still remained positive, however they evidently became worse and hold out the prospect of a decelerated pace of the decrease in unemployment rate in the second half of 2012. In July and August consumer expectations about changes in the number of the unemployed during the upcoming 12 months also worsened. It shows regenerative uncertainty of the national business participants about business development in the near future and the increase in number of the employees.

Due to open EU labour market, decrease in the number of population and its ageing, any growth of the manpower  or decrease stabilisation is not expected in medium-term. It is projected that the average annual number of the employed will grow by 3.3 per cent by 2015, while the unemployment rate will decrease to 9.8 per cent.

In shaping the medium-term economic development scenario, as in April 2012, it was based on the presumption that the EU will succeed in managing the eurozone financial stability risk, and external environmental assumptions are in line with the 2012 Spring Forecast of the European Commission projecting both the EU and eurozone economic recovery in 2013. 

However, as compared to the situation in April 2012, a negative risk for coming to fruition of economic development scenario strengthened. At a time of historically most severe European crisis, a great uncertainty prevails. It is forecasted that in the third quarter of 2012 the eurozone economy will further keep declining and technical recession will be recorded. The certainty that all debt-crisis stricken EU Member States will successfully implement structural reforms and overcome it has not been reached yet. The risk exists that due to intensified eurozone problems, a sudden growth of credit risk in the banking sector may occur, which would negatively affect the financial stability.

The forthcoming Report on Situation in Greece developed by creditor Troika experts will determine important EU leadership decisions on further credit terms for Greece and fiscal deficit and debts of the EU Member States reduction plans that, in their turn, will affect international markets and further EU economic development.

Upon occurrence of additional data on verification of negative risks and their impact on a real sector, the projections may be changed. Lithuanian export market perspective in the EU further remains to be the basic risk factor for revision of the economic development scenario.

Projections of Lithuanian Economic Indicators (September 2012)