The Lithuanian EconomyMonthly newsletter from Swedbank’s Economic Research Departmentby Nerijus Mačiulis, Vaiva Šečkutė No. 3 • 2012 04 10 Demand keeps a lid on inflation, but oil will stimulate it The rate of growth of industrial prices continued decelerating in March; however, prices of goods sold in the local market started growing faster than those sold in foreign markets, reflecting stronger domestic demand. Consumer prices grew by 1% in March, at the fastest pace in a year, and were 3.6% higher than a year ago. Higher-than-anticipated oil price growth might contribute to higher inflation going forward even though the growth of manufacturing prices has subsided. Lithuania’s term of trade deteriorated somewhat in 2011 as import prices grew faster than export prices. This was caused by a spike of oil prices at the beginning of this year and relatively weak demand in the main export markets.Industrial prices grow slower domestic demand was still stagnating while exports soared, manufacturers were able to increase pricesAnnual growth in industrial prices has been of exported goods more rapidly.decelerating since September of 2011 and in Marchof this year prices were 7.1% higher than a year Annual changes in manufacturing prices, %ago. In March, annual industrial price growth in theLithuanian market was 7.3% compared with 6.8% in 30foreign markets. 20Annual change in industrial prices, % 10 30 0 20 -10 10 -20 0 -30 -10 2008 2009 2010 2011 2012 Manuf acturing Manuf acturing (excl.ref ined products) Manuf acture of f ood products -20 Source: Statistics Lithuania -30 The growth of manufacturing prices has also been 2008 2009 2010 2011 2012 Lithuanian market Non-Lithuanian market declining rapidly since the middle of last year; in Total market March, they were 6.2% higher than a year ago. Source: Statistics LIthuania Furthermore, manufacturing prices, except for refined petroleum products, were only 0.7% higherIn December, for the first time in the past two years, in March than a year ago.industrial price growth in the Lithuanian marketstarted outpacing industrial price growth in foreign Manufacturing prices of food products have notmarkets. This probably reflects the weakening of been reflecting global trends. Although Swedbankforeign demand for manufacturers products, in food commodity index in February was 16.2% lowercontrast to the boom in domestic demand. The than a year ago, manufacturing prices of food inopposite trend was observed in 2010 – because Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000 E-mail: email@example.com www.swedbank.com Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720. Nerijus Mačiulis +370 5 2582237 Lina Vrubliauskienė +370 5 258 2275. Vaiva Šečkutė +370 5 258 2156.
The Lithuanian Economy Economic Research Department, Swedbank No. 3 • 2012 04 10Lithuania were 3.7% higher in February than a year Inflation expectationsago. 60Consumer inflation edges upwards, butprobably only temporarily 40Although annual inflation growth subsided at the 20end of last year to 3.4%, it started increasing againat the beginning of this year, reaching 3.7% in 0February and 3.6% in March. Food, housing, andtransport have remained the main contributors to -20inflation this year, as in 2011; however, during thelast couple of months, prices of other goods havebeen rising as well, indicating stronger demand of -40non-necessities. 2010 2011 2012 Construction Serv ices Retail Industry ConsumersContribution to annual CPI growth, pp Sources: Statistics Lithuania, Swedbank 6 Terms of trade worsened again in 2011 4 The terms of trade are a measure of a country’s export prices in relation to its import prices. A rise in 2 this measure means that the countrys terms of trade have improved or that the country can buy more imported goods for the same amount of 0 exported goods. A decrease in this measure means that the countrys terms of trade have deteriorated from a year ago and the country needs to export -2 more goods to buy the same amount of imported 2010 2011 2012 goods. High terms of trade mean higher foreign Food Transports Housing demand for local exports, which, in turn, increases Others CPI growth Source: Statistics Lithuania, Swedbank local income, and vice versa.Prices in the sectors of restaurants and hotels, Annual change in terms of trade and import and export prices, %education, health, and alcoholic beverages andtobacco started accelerating this year. Clothing and 25footwear prices were falling during the first two 20months of this year, but became dearer in March 15and were the main contributors to inflation. The endof seasonal sales and new spring collections were 10behind 5.4% jump in clothing and footwear prices. 5 0At the beginning of this year, higher prices of -5electricity, gas, and heating have contributed to -10somewhat higher inflation; however, this will haveonly a limited effect and annual inflation is expected -15to decline later this year. -20 2006 2007 2008 2009 2010 2011The decreasing growth of manufacturing and Export prices Import prices Terms of trade Income terms of tradeindustrial prices suggests that consumer prices Source: Statistics Lithuaniashould subside somewhat as well. However, thereis no clear trend in inflation expectations. Eventhough inflation expectations for consumers, However, sometimes the terms of trade can beservices, and construction did rise this year, retail increasing due to rapid growth in labour costs. Thistrade and industry sectors expectations decreased does not cause a big problem if growth ina bit. Inflation will depend mostly on developments productivity keeps up the pace. From 2005 untilin global commodities markets. 2008, wages in Lithuania were increasing much faster than productivity; thus, the increase in export prices (and the terms of trade) was accompanied by 2 (4)
The Lithuanian Economy Economic Research Department, Swedbank No. 3 • 2012 04 10a loss of competitiveness, which hit the Lithuanian though it would stimulate domestic demandeconomy exceptionally hard in 2009. somewhat and might even help to narrow the scopeThe terms of trade in Lithuania deteriorated most – of smuggling.by 5.9% – in 2009 as prices of exports fell by 16.7% Prospects for euro adoptionwhile prices of imports fell by only 11.5%. After Due to global developments, inflation remains onesome improvement in 2010, Lithuania’s terms of of the main obstacles to compliance with thetrade again worsened a bit in 2011. However, the Maastricht criteria. Currently, we forecast averageincome terms of trade1 have been increasing, annual inflation to decline to 2.5%, but it seemsexcept for 2009, when a 26.6% decrease in total increasingly unlikely as higher-than-expected oilexport value outpaced the decrease in import prices will increase inflationary pressures inprices. Overall, the recent deterioration in the terms Lithuania. The relatively high unemployment levelsof trade was caused not by worsening and weak employee negotiation powers suggestcompetitiveness, but by rapidly increasing oil prices. that wages will be increasing in line withLithuania’s terms of trade and the growth of its productivity; thus, domestic inflationary pressureseconomy will be affected by the health of its main will be weak.export markets, companies’ competitiveness, and Another possible obstacle to the introduction of thethe price of oil and other commodities, on which euro might be the pace of price convergence, whichLithuania is heavily dependent. has not been very fast in Lithuania. In 2010, the price level in Lithuania was still only 59.7% of thePrice of oil (per barrel) and wholesale petrol (per litre) EU level, whereas it was 64.1% in Latvia and 4.9 100 68.1% in Estonia. Although prices of some products are already the same as the EU average (e.g., 4.7 95 footwear and clothes), prices of education and housing were only 33.5% and 44.8% of the EU 4.5 90 average in 2010. This means that the prices of most 4.3 85 products in Lithuania will keep growing faster than the EU average. However, this does not necessarily 4.1 80 mean that Lithuania will lose competitiveness due 3.9 75 to an appreciating real effective exchange rate – the effect can be offset by faster productivity 3.7 70 growth. 3.5 65 Jan-11 Mar-11 May -11 Jul-11 Sep-11 Nov -11 Jan-12 Gasoline (A95) LTL Diesel LTL Brent oil, EUR (rs) Vaiva Šečkutė Sources:Reuters Ecowin, Orlen Lietuv a Nerijus MačiulisIn March prices of gasoline and diesel at gasstations have reached record highs. The mainfactor is the price of oil, which is hovering aroundEUR 95 per barrel, some 10% higher than duringthe previous peak in the summer of 2008. Theseprices have also been influenced by the muchweaker euro exchange rate. Neither of these factors– the price of oil or the euro exchange rate – can becontrolled by Lithuania.However, the gasoline excise duty is some 20%above the minimum allowed by the EU. Althoughlowering the excise duty would lower the price ofgasoline by about LTL 0.30, this would create a LTL100 million shortage in the state budget. Thus, wedo not think it is a very viable alternative, even1 This determines the volume of imports that a countrycan obtain with its export earnings; it is calculated bydividing change in total export value by change in importprice. 3 (4)
The Lithuanian Economy Economic Research Department, Swedbank No. 3 • 2012 04 10SwedbankEconomic Research Department Swedbank’s monthly newsletter The Lithuanian Economy is published as a service to ourSE-105 34 Stockholm customers. We believe that we have used reliable sources and methods in the preparationPhone +46-8-5859 1028 of the analyses reported in this publication. However, we cannot guarantee the accuracy firstname.lastname@example.org completeness of the report and cannot be held responsible for any error or omission in thewww.swedbank.com underlying material or its use. Readers are encouraged to base any (investment) decisions on other material as well. Neither Swedbank nor its employees may be held responsible forLegally responsible publisher losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’sCecilia Hermansson, +46-8-5859 7720. monthly newsletter The Lithuanian Economy.Nerijus Mačiulis, +370 5 2582237.Lina Vrubliauskienė, +370 5 258 2275.Vaiva Šečkutė, +370 5 258 2156. 4 (4)