The Lithuanian Economy - 2010, May


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The Lithuanian Economy - 2010, May

  1. 1. The Lithuanian Economy Monthly newsletter from Swedbank’s Economic Research Department by Ieva Vyšniauskaitė No. 01 • 2010 05 18 Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000 E-mail: Legally responsible publisher: Cecilia Hermansson, 08-5859 1588. Lina Vrubliauskienė +370 5 268 4275. Ieva Vyšniauskaitė +370 5 268 4156. The bottom of the recession may have been reached in the 1st quarter of 2010  After two periods of expansion on a quarterly basis, Lithuanian GDP fell by 4.1% quarter on quarter (2.9% year on year) during the 1st quarter of 2010, according to the first statistics estimate. The contraction of GDP was to be expected because the economy was affected by several adverse factors, such as the shutdown of the Ignalina nuclear power plant and increases in oil and other commodity prices in the world markets. The recovery in exports was not large enough to compensate for the persisting contraction in domestic demand.  We remain cautiously optimistic and expect economic growth on a quarterly basis to become positive starting the 2nd quarter of 2010. Most recent business surveys point to a slow revival in activity. Consumer confidence has also gradually become less negative, and the housing sector is showing signs of stabilisation.  The forecasted upturn during the 2nd quarter will be led by the export-oriented manufacturing sector, but domestic sectors will also show somewhat better results. The economic downturn affected individual manufacturing sectors unevenly, and their recovery will vary as well. Given 1st quarter results, we are becoming more optimistic regarding the recovery of production volumes of, among others, rubber and plastics, wood, and paper products. Recovery of exports did not offset the continuing contraction in domestic demand in the 1st quarter of this year The slow recovery of the Lithuanian economy observed in the second half of 2009 failed to continue this year. While the Lithuanian economy recorded positive quarterly growth rates in the 3rd and last quarters of 2009, in the 1st quarter of 2010 Lithuanian GDP fell by 4.1% on a quarter-on- quarter basis (2.9% year on year), according to the first statistics estimate. The largest decrease in the value added was observed in the construction sector as the real estate market continued to stagnate. The change in the value added created by the agricultural sector was close to the decrease in the value added of the whole economy, while the industrial sector recorded the smallest decline in the value added. The decline in the value added was somewhat absorbed by positive changes in the indicators of transport and storage enterprises. GDP growth, quarter-on-quarter -16 -12 -8 -4 0 4 2004 2005 2006 2007 2008 2009 2010 Even though the 1st quarter GDP results cannot necessarily be regarded as good news, they were slightly better than we forecasted. The GDP decline in the 1st quarter was expected, given the following adverse factors that played a part in economic developments during that period.
  2. 2. The Lithuanian Economy Economic Research Department, Swedbank 01 • 2010 05 18 2 (4) First, despite an improvement in confidence, household consumption remained anaemic due to falling wages, poor employment prospects, and an omnipresent cautiousness regarding spending. Even though the share of electricity in the consumption basket is quite small, a 30% increase in electricity tariffs for household consumers due to the decommissioning of the Ignalina nuclear power plant exerted a further significant negative shock to household spending. Second, although there were some first signs of stabilization in the real estate market (visible in the somewhat increased activity and the slowdown in the decline of residential real estate prices; over March 2010, prices in the capital of Vilnius increased by 3.3% on a monthly basis), the real estate market continued to stagnate. Real output in the construction sector declined by 43% during 2009, and contracted further by 40.8% year on year in the 1st quarter. Investment activity overall is likely to have kept on falling, given the still-high spare capacity, high risk estimates, and uncertainty about domestic and external demand developments. Finally, companies were subject to yet another set of challenges in the beginning of the year because of the rise in costs driven by the increases in commodity prices. An increase in gas prices in world markets, for instance, affected the manufacturing of chemicals and chemical products. The rise in electricity prices for companies due to the Ignalina nuclear plant shutdown had an impact on activities in the construction, paper, wood, and textile sectors. The share of electricity in total cost structure in these sectors in some cases could reach about 10%. It will take more time for companies to adjust to the increase in costs and/or to pass through these cost increases to customers because the recovery in domestic demand is several months away and the revival in external demand still insufficient. Another setback is highly unlikely this year… Even though some of the aforementioned adverse factors will continue to be felt over the year to some extent, the 2nd quarter will bring more favourable developments. We are of the opinion that the bottom of the economy has been reached; however, we remain cautious and expect a slow recovery going forward. Quarter-on-quarter GDP rates are likely to be positive starting in the 2nd quarter, while, on an annual basis, quarterly GDP growth might be negative for some time. There is no reason, however, to forecast another setback of a large magnitude this year. Leading indicators have pointed to a revival in activity for several months: industry, retail, and services sentiments have been generally on an upward trend since the last quarter of 2009. Consumer sentiment has also been improving since November 2009. Consumer confidence indicator -60 -40 -20 0 20 2008 2009 2010 -80 -40 0 40 80 120 Consumer confidence indicator (l.s) General economic situation over next 12 months (l.s) Unemployment expectations over 12 months (r.s) Financial situation of households over next 12 months (l.s) Savings over next 12 months (l.s) Data on Lithuania’s large export-oriented industrial sector lead us to forecast somewhat better developments starting in the 2nd quarter. The year– on–year contraction of industrial production has also been slowing since May 2009, while, over the 1st quarter of 2010, industrial production contracted by 4% compared to the same period a year ago1 , which is a much smaller decline than during the last quarter of 2009. Over March, industrial production rose by 1% year on year (the first increase in annual terms since October 2008) Manufacturing activity results might not be spectacular as of yet, given the reliance of the sector on the performance of the Orlen Lietuva (previously Mazeikiu Nafta) oil refinery. The closing down of this refinery for repairs for approximately a month in the beginning of the year was one of the main factors behind the fall of manufacturing activity by 6.4% year on year over the 1st quarter of 2010. Manufacturing activity excluding refined mineral products, meanwhile, rose by 1% over the 1st quarter compared with the same period a year ago, and, over March, increased by 16% month on month and 5.3% year on year. We forecast industrial production to still contract overall this year, and some ad hoc movements are possible, given the uncertainties regarding domestic recovery and mixed signals coming from the main trade partners. The improvement in industrial 1 None of the industrial production indicators in this and the following paragraphs are seasonally or working-day adjusted.
  3. 3. The Lithuanian Economy Economic Research Department, Swedbank 01 • 2010 05 18 3 (4) production results, however, is unlikely to face material impediments this year. Lithuania’s industry, year-on-year -30% -20% -10% 0% 10% 20% 2006 2007 2008 2009 2010 Industrial production Manufacturing (refined petroleum products excluded) Industrial confidence indicator -80 -60 -40 -20 0 20 40 2008 2009 2010 Industrial confidence indicator Assessment of stocks Production expectations over the next month Assessment of total orders Even considering the drastic contraction rates in 2009 and thus the very low comparative base, the rebound of the transport sector is one of the most significant. The sector appeared to be surprisingly resilient in spite of some adverse factors, including cost increases and the elimination of preferential tax rates for biofuel starting in the beginning of 2010. This improvement is primarily driven by the increase in cross-border, rather than domestic, services. Domestic demand-oriented sectors might experience the first glimpses of light at the end of the tunnel starting in the 2nd quarter as well. As mentioned above, confidence indicators portray steadily improving expectations, while retail sales at the end of the 1st quarter also showed better results. Manufacturing production volumes improving, though individual sector developments uneven The economic downturn affected manufacturing sectors unevenly; however, hardly any sector started this year without a scratch. Whereas companies expect to break even or show a profit at the end of this year, the majority of them consider 2009 a lost cause and are content to have survived. Industrial production, year-on-year -80% -60% -40% -20% 0% 20% 40% Transport Machinery repairs Metals Manufacturing Furniture Food Beverages Textile Wood Optical instruments Chemicals Rubber, plastics Paper 2009 (IV) 2010 (I) Food, tobacco, and refined mineral product sectors proved to be the most resilient in 2009 (it is though necessary to mention that these sectors are generally considered less susceptible to business cycle fluctuations). Production of paper and related products also experienced a less severe decline in their production volumes. The computer and optical equipment sector, the one higher-value-added sector with a more or less significant share in Lithuania’s total industrial production volumes, was able to grow last year mostly due to its successful previous penetrations into the niche export markets. Developments in the machinery repairs sector have been highly uneven as companies might have preferred to fix rather than buy new equipment in certain periods; meanwhile, transport equipment, furniture, textile, and wood and building material production fell severely during the first half of 2009. Although generally less susceptible to business cycle fluctuations, manufacturing of chemicals and chemical products plunged in the first half of 2009 due to the fall in prices of pesticides and increase in gas prices in world markets. In terms of value added, it appears that medium- value- added sectors, which occupy the larger share of Lithuanian industrial production, have been overall more resilient.
  4. 4. The Lithuanian Economy Economic Research Department, Swedbank 01 • 2010 05 18 4 (4) Exports of goods, year-on-year -20% 0% 20% 40% 60% 80% Optical instruments Chemical products Food Textile Metal etc Furniture Machinery Mineral products Other Wood Plastics Paper Transport 2010 (I) As industrial production starts to show the first signs of recovery, some sectors will be driving growth, and some may be experiencing difficulties for a somewhat longer time. Compared with the contraction during the first three quarters of 2009, production of paper, wood, textile, and food appears to have rebounded the most. Metals have also shown improvement, although, after seemingly strong growth in the last quarter of 2009, production fell on a yearly basis again in the 1st quarter of 2010. Chemicals and chemical product growth had already moved into positive territory in the second half of 2009, while manufacturing of rubber and plastics products, after contracting during all of 2009, registered a quite comfortable positive growth rate in the 1st quarter of 2010. It is apparent that the increase in production volumes in most sectors (for instance, plastics and rubber, textile, wood, and, to some extent, metals, was due to the recovery in external demand. For some sectors, however, this is not so clear: chemicals and chemical product exports improved only marginally last year, while they fell by 11.6% during the 1st quarter. Exports of food also declined on a yearly basis in the 1st quarter; however, the large share of the production of the sector (about 60% of the total) is consumed domestically. The sectors that took the lead in export recovery at the end of 2009 due to improvement in external demand – for instance, wood, furniture, plastics, and rubber – are likely to continue performing well. The good news is that the majority of domestic demand-oriented sectors, except building materials, are generally considered less susceptible to business cycle fluctuations. Thus, food, pharmaceuticals (about 55% consumed in Lithuania), and also paper (about 58% sold in Lithuania) are likely to be able to increase their production this year. Building materials are unlikely to rebound until the middle of 2011, while beverages (close to 80% of production sold in Lithuania) will also be experiencing difficulties for some time to come. The longer-term developments in Lithuania’s industrial sector should be on a subtler and more complex level, and should be promoting a shift in industrial structure. Even though traditional manufacturing industries like wood and metal processing will always play an important role in Lithuania due to the available resources, growth in the higher-value-added products will be required to generate sustainable growth - i.e., sophistication of the products, more effective use of capital, the strengthening of horizontal links, and the creation of new clusters within the Baltic region. Ieva Vysniauskaite Swedbank Economic Research Department SE-105 34 Stockholm Phone +46-8-5859 1028 Legally responsible publisher Cecilia Hermansson, +46-88-5859 1588. Lina Vrubliauskienė, +370 5 268 4275. Ieva Vyšniauskaitė, +370 5 268 4156 Swedbank’s monthly newsletter, The Lithuanian Economy is published as a service to our customers. We believe that we have used reliable sources and methods in the preparation of the analyses reported in this publication. However, we cannot guarantee the accuracy or completeness of the report and cannot be held responsible for any errors or omissions in the 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 for losses or damages, direct or indirect, owing to any errors or omissions in The Lithuanian Economy.