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The Lithuanian Economy - No 6, September 2, 2011

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  • 1. The Lithuanian EconomyMonthly newsletter from Swedbank’s Economic Research Departmentby Nerijus Mačiulis No. 06 • 2011 09 02 Growth slows gradually  Annual GDP growth in the second quarter of this year slowed to 6.3% (6.5% in the first quarter), mainly due to completion of the restocking process.  July data suggest that growth in the third quarter may slow further – annual growth in retail trade contracted rapidly, and there were signs of contraction in industry. However, retail trade, excluding motor vehicles, continued its rapid increase and in July was 7.3% higher than a year ago. Despite the very negative global environment, consumer expectations declined by only 2 percentage points in August. Expectations and consumption may be boosted by the European Basketball Championship, which is being held this month in Lithuania.  Second-quarter unemployment, in line with our expectations, was at 15.6%, a sharp decline from 17.2% in the first quarter. This trend is likely to continue in the second half of this year, and we expect unemployment to be at 14.3% by year’s end. The rapidly increasing labour force activity rate suggests that the increase in emigration has not had a significant impact on the labour force.Growth was driven by investments and uncertainty regarding future demand looms, it ishousehold consumption likely that restocking will not contribute much toGrowth was slightly slower in the second quarter of growth during the rest of this year.this year, when GDP was 6.3% higher than in the Contributions to GDP growthsame period a year ago. Seasonally adjustedquarterly growth slowed more noticeably – to 0.4% 30%in the second quarter, compared to a very strong 20%growth (3.5%) in the first. The slower growth pace is 4.8% 6.9% 6.3% 10%expected to continue for the rest of this year, for -2.0% 1.0% 1.2%which a growth rate of 6.0% is expected. 0% -14.0%-15.9%-14.5%-14.5% -10%As in the first quarter, household consumption andinvestments in the second quarter contributed to -20%GDP growth the most – 4.3 and 4.1 percentage -30%points, respectively. As domestic demand forimported goods increased, net exports registered a -40%negative contribution to growth for the fourth quarter 2009 2010 2011in a row. Household consumption Gov ernment consumption Inv estment (excl. inv ent.) Inv entories Net export GDP growthAn important factor behind growth in 2010 and the Source: SL and Swedbankfirst quarter of this year was the accumulation ofinventories. During the recession, companiesminimised needed resources, as well as Household consumption growth accelerated,intermediate and final goods in their warehouses increasing by 6.7% in the second quarter of thisand did not start to rebuild normal levels of year, compared with the same period a year ago.inventories until the beginning of last year. Because As real wages in the second quarter were 2.3%stock levels are approaching optimal levels and lower than a year ago, growth in consumption Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000 E-mail: ek.sekr@swedbank.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.
  • 2. The Lithuanian Economy Economic Research Department, Swedbank No. 06 • 2011 09 02probably reflects higher capital income and a lower More worrying developments could be seen at thesavings rate. beginning of this quarter – in July, compared with June, seasonally adjusted industrial productionAnnual growth in gross fixed capital formation contracted by 0.6%. Annual growth in July sloweddecelerated in the second quarter to 23.1%, down to 6.8%, the weakest pace in a year.from 41.0% in the first quarter. The slowdown wascaused by lower investments in construction and Manufacturing, however, continued its growth –repairs of buildings and civil engineering structures seasonally adjusted monthly growth in July was a(roads, power lines, sewage systems etc). solid 3.5%. Annual growth of manufacturing slowedCompanies continued investing in machinery and only a little, to 7.8%.equipment, which increased by 66.5% and 64.5% in Industrial confidence and change in manufacturing, %the first and second quarters of this year, comparedwith the same periods a year ago. Despite a rapid 30recovery, investments are still some 38% below the 20levels reached before the crisis. 10GDP dynamics by expenditures, % 0 40% -10 30% -20 20% 11% 10% -30 0% -40 -10% -20% -10% -6% -20% -14% -50 -30% 2008 2009 2010 2011 -40% Industrial conf idence Assessment of stocks -50% -38% Production expectations Manuf acturing excl. petrol. -60% Source: Statistics Lithuania GDP Household Gov . Inv estment Exports Imports consumpt. consumpt. (excl. inv entories) Future developments are less certain and may Contraction f rom peak to trough Growth f rom trough to 2Q 2011 cause some concern. The industrial confidence Current position f rom the peak indicator plunged from +6 in July to -4 in August. Source: Statistics Lithuania, Swedbank calculations The main reason for this was a bleaker assessment of inventories and a sharp drop inSix quarters into the recovery after the biggest production expectations, from 29 to 6. Exportrecession since the reinstatement of independence, expectations also fell from 18 to 9. However, theLithuania’s GDP is still 10% below its previous business survey shows the assessment of currentpeak. Construction grew rapidly in the first half of demand in August as virtually unchanged. Thus,this year, when it was 16.8% higher than a year expectations probably were hurt by the strongago, but it still remains some 20% below the turbulence in financial markets and fears of aprevious highs. As demand for housing remains second recession, which has yet to materialise.weak, it may take a few years before the Retail trade wobblesconstruction sector sets new records. Annual growth in retail trade in July slowed toIndustrial production slows 16.9%, down from a record 25.6% in June. TheLithuanian industry grew strongly in the first and main reason for this slowdown was much weakersecond quarters of this year, when it was, car sales, which dropped by more than 20%. Thisrespectively, 14.6% and 10.7% higher than a year was not unexpected, as sales in the first half of thisago. Manufacturing grew even more strongly in the year were boosted by strong demand from Belarus,first quarter of this year, by 21.7%, but annual Kazakhstan, and Russia, all of which faced highergrowth slowed to 12.2% in the second. import taxes on cars as of July 1. Retail trade, excluding motor vehicles, continued its rapid growth and was 7.2% higher than a year ago. So far, consumption of food, beverages, and tobacco has been recovering very slowly – during the first seven months of this year, retail trade increased by a meagre 0.5%. This may change in 2 (4)
  • 3. The Lithuanian Economy Economic Research Department, Swedbank No. 06 • 2011 09 02the second half of 2011, as unemployment drops, motivating long-term unemployed to seekinflation slows, and wages keep increasing. Already employment more actively.in July, retail trade of food, beverages, and tobaccowas 5.5% higher than in June; however, the In the second quarter, average monthly grossintroduction of cash registers in markets may have wages were 1.7% higher than in the first, and 2.5%boosted official statistics. higher than a year ago. Growth in wages still lags behind inflation, further denting consumers’Retail trade and confidence, % purchasing power. However, we expect this trend to 30 be over by the end of this year and real net wages 20 to increase by 3% next year, further supporting 10 domestic demand. 0 -10 Unemployment, % -20 40% -30 35% -40 33.6% -50 30% -60 25% 2008 2009 2010 2011 20% Retail conf idence Consumer conf idence 15% Retail trade, y oy 15.6% Retail trade, except of motor v ehicles, y oy 10% Retail sale of f ood, bev erages and tobacco, y oy 5% 8.0% Source: Statistics Lithuania 0%Both retailer and consumer confidence declined by 2007 2008 2009 2010 2011 Unemploy mentonly 2 percentage points in August. This is a mild Y outh (15-24) unemploy mentwobble, considering financial market volatility and Long term unemploy ment Source: Statistics Lithuania and Swedbankthe abundance of negative news in the media. Weexpect household consumption to continue itsgradual increase. European Basketball Interestingly, despite official emigration of aroundChampionship, which started at the end of August 150,000 inhabitants from 2008 until August of thisand will continue until the end of this month, may be year, the labour force during the same periodone of the reasons why expectations remained increased by some 50,000 people. These datarelatively upbeat. This event not only will have indicate that most emigrants must have beenpositive impact on domestic consumption, but will previously economically inactive inhabitants (i.e.,also boost the growth of exports of tourism services neither employed nor job seekers). This is reflectedby some 5 percentage points. in the higher activity rate – over the same period, the rate increased from 67.2% to 72.3%, indicatingUnemployment is lower and activity rate is that a larger fraction of the working-age populationhigher is part of the labour force. Another possibleThe sharp decline in unemployment in the second explanation is that actual emigration during thisquarter of this year was not unexpected and is likely period was lower: some who had previouslyto continue in the second half of 2011 and we emigrated decided to register their emigrationexpect it to reach 14.3% by year’s end. retroactively, as there were tax incentives to do so..In the second quarter, youth (aged 15-24) The fact that emigration has not yet hurt the labourunemployment remained persistently high, but this force should not mislead us into thinking that therewas exacerbated by school and university leavers, is no problem – structural reforms in the labourwho had recently joined the labour market. Long- market and, perhaps, a more flexible immigrationterm unemployment declined a little, but remains policy are desperately needed.persistently high. A likely increase in the minimummonthly wage next year may widen the gapbetween social benefits and the minimum wage, Nerijus Mačiulis 3 (4)
  • 4. The Lithuanian Economy Economic Research Department, Swedbank No. 06 • 2011 09 02SwedbankEconomic 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 orek.sekr@swedbank.com 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)