Focus on Lithuania (IBR 2013)


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What is the outlook for the Lithuanian economy in 2014? Drawing on 200 business interviews in Lithuania as well as IMF and EIU data this report reveals that business growth prospects in the economy are relatively helpful and leaders still want to join the euro.

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Focus on Lithuania (IBR 2013)

  1. 1. Focus on: Lithuania Grant Thornton International Business Report 2013
  2. 2. Focus on: Lithuania Introduction 200 business interviews Lithuania is a country is an eastern European economy of around 3m people. In 2012, its GDP was approximately US$42bn, making it the 82nd largest economy in the world. It is the largest and most populous of the three Baltic states and accounts for 46% of the region’s total GDP. Drawing on data sources such as the Economist Intelligence Unit (EIU), the International Monetary Fund (IMF) and the Grant Thornton International Business Report (IBR), this short report considers the outlook for the economy, including the expectations of 200 businesses interviewed in Lithuania, and more than 12,500 globally, over the past 12 months. Genadijus Makuševas Grant Thornton Rimess UAB Managing partner T +370 5 212 7856 E  W US$42bn gross domestic product 3 million inhabitants Focus on: Lithuania 2
  3. 3. Focus on: Lithuania Economy Economy slowed to The pace of expansion in the Lithuanian economy slowed to 3.6% in 2012, down from 5.9% in 2011, as the eurozone sovereign debt crisis dampened regional growth prospects. The government is still aiming to follow neighbours Estonia and Latvia into the single currency in 2015 and is expected to comfortably meet accession criteria for the deficit, public debt and exchange rate but this will require significant fiscal consolidation which will rub against 15.0% calls for more budget target flexibility that the ruling party campaigned on in 10.0% 2012. Russia and Germany are key trading 13.2% partners. Refined petroleum account 9.1% for 22% of exports. 3.6% Export markets in 2012 15.0% 15.0% 15.0% Russia Germany 46.4% Latvia Poland Netherlands Other 10.0% 13.2% 9.1% 13.0% 46.4% 6.4% 12.0% 5.9% 4.4% 12.0% 4.4% 6.4% 5.9% 13.0% 9.2% 9.2% 4 Key indicators • the economy expanded by 2% year-onyear in Q3, slightly down on growth of 3.5% and 3.8% in the previous two quarters of 2013 respectively • real wages rose for the first time since the financial crisis in Q1 and Q2-2013, helping to boost private consumption by 4.9% year-on-year in the second quarter • the unemployment rate fell to 11.9% in September, the lowest level since Q4-2008, and down from 13% a year earlier, although net migration is still negative and more than 250,000 jobs have been lost since the financial crisis 15.0% • exports climbed by 16.0% in Q3 from the same period 12 months previously, 15.0% up from 10.6% in Q2; imports grew 10.0% by 11.5% in Q3, down from 15.9% in the 13.2% 9.1% 10.0% previous quarter 13.2% • inflation was up by 0.4% in September 9.1% 6.4% from the same period in 2012, with a 0.7% rise recorded since August5.9% 6.4% 5.9% Import sources 4 3 15.0% 15.0% Germany Russia Poland Latvia Netherlands Other 3 13.0% 46.4% 13.0% 46.4% 2 12.0% 9.2% 12.0% 4.4% 2 1 9.2% 4.4% Source: Observatory of Economic Complexity (2013) 1 4 0 4 0 2012 3 2012 2013 2014 2015 2013 Focus on: Lithuania 3 2016 2017 20
  4. 4. 2% Focus on: Lithuania 15.0% 5.9% 10.0% 13.2% 13.0% 46.4% 46.4% 4 13.0% 4 3 2 1 12.0% 15.0% 9.2% 3 2 1 2013 2014 0 2012 2013 2014 Source: Economist Intelligence Unit (2013) 2015 2016 2017 Real GDP growth (%) Consumer price inflation (av; %) 3.2% 2015 in 2013 Growth and inflation forecasts 2012 forecast growth 9.2% 0 3.7% The government is targeting a fiscal deficit of 1.9% of GDP in 2014, well within the level necessary for eurozone entry. Tax revenues are expected to increase by 5.1% as rising wages and falling unemployment boost returns from income and consumption. Maastricht criteria for eurozone entry should easily be met and with inflation falling, the government is expected to ask in early 2014 to be admitted into the single currency. The budget balance is expected to decline from -3.3% of GDP in 2012 to -1.3% in 2016. 12.0% 4.4% Stronger than expected growth in Q3 of 2.0% means forecast growth of 9.1% 2.9% across 2013 is likely to be beaten, with the government forecasting 6.4% expansion of 3.7%. Private consumption has picked up in recent months 5.9% 4.4% as rising real wages and consumer confidence coupled with falling unemployment boosts spending. This trend is expected to continue on into 2014 with real GDP growth of 3.2% currently forecast, rising to 3.4% in 2015. Wage growth has been supported by the 18% nominal increase in public sector wages for the lowest paid but private sector salaries (3.8% vs 2.2%) actually rose faster in Q2 suggesting a more sustainable, less fiscally draining, outlook for earnings. Rising domestic demand will boost imports but the external sector is likely to remain a net contributor to GDP growth next year (0.4%) as internal demand in Lithuania’s major trading partners accelerates even faster. 10.0% 15.0% 9.1% Economic outlook 6.4% 15.0% forecast growth 2016 in 2014 2017 Focus on: Lithuania 4
  5. 5. Focus on: Lithuania Business growth prospects Business optimism in Lithuania remained steady at 15% in Q3, ahead of peers in Estonia (12%) and Latvia (-4%), and the eurozone average (8%). Business leaders are more optimistic about the growth of their own operations: 42% of Lithuanian businesses expect revenues to rise in the year ahead, in line with average over the past 12 months. The Baltics average is marginally higher at 44% but the eurozone average much lower at 26%. Expectations for profitability are subdued in Lithuania: just net 9% expect to see profits climb in the year ahead, behind Estonia (32%) and Latvia (14%). Net percentage of businesses expecting to increase exports (next 12 months) Q3-2013 Baltics Q2-2013 31 Lithuania 31 eurozone to rise 19 Net percentage of businesses expecting to increase investment in plant & machinery (next 12 months) Q3-2013 54 57 Lithuania Q2-2013 eurozone 19 47 Baltics Lithuania 24 eurozone 24 56 Lithuania Q1-2013 38 eurozone Baltics 26 Baltics Lithuania Q4-2012 25 eurozone Baltics 22 Baltics Q1-2013 expect revenues 26 eurozone 31% Increasing regional vitality is evidenced in the exports figures. Across the eurozone net 26% of business leaders expect to see exports increase over the next 12 months, up from 19% three months previously. In Lithuania the figure is even higher at net 31%, ahead of Estonia (26%) and Latvia (18%). Levels of expected investment in plant & machinery remain elevated in Lithuania which bodes well for long-term growth prospects. At net 57%, Lithuanian businesses are planning more spending that peers across the Baltics (54%) and more than double that in the eurozone (25%). 26 Lithuania eurozone Baltics Lithuania Source: Grant Thornton IBR 2013 17 Q4-2012 32 eurozone Baltics 36 Lithuania 64 66 22 52 56 Source: Grant Thornton IBR 2013 Focus on: Lithuania 5
  6. 6. Focus on: Lithuania Constraints on expansion A shortage of finance emerges as the most pressing constraint on the ability of Lithuanian businesses to grow their operations. It is cited by 45% of businesses in the economy, well above neighbouring Latvia (36%) and Estonia (24%) which are much closer to the eurozone average (27%). A lack of skilled workers (42%) is also a major constraint and is brought into sharper focus as the population continues to decline. Business leaders in Latvia (50%) and Estonia (38%) are also struggling with a lack of talent in comparison to the eurozone average (26%). More than two in five businesses in Lithuania cite regulations and red tape as a constraint (41%), slightly above the eurozone average (35%) but much higher than the other Baltic nations – Latvia (30%); Estonia (18%). The principal area in which Lithuanian businesses are struggling less that the eurozone average is demand for their goods and services. More than a third of businesses within the single currency are cite a shortage of orders (36%) compared to just under a quarter in Lithuania (24%). Infrastructure is well down the list of concerns of Lithuanian business leaders. Just 12% cite transport infrastructure as a constraint on growth and just 6% cite ICT infrastructure. Percentage of businesses citing factors as constraints on their ability to grow their operations 45 42 27 Shortage of finance 41 26 Lack of skilled workers 35 36 24 Regulations & red tape 12 shortage of finance 6 7 Transport infrastructure constraining growth Shortage of orders Source: Grant Thornton IBR 2013 a lack of 11 ICT infrastructure Lithuania eurozone talent is a challenge Focus on: Lithuania 6
  7. 7. Focus on: Lithuania Lithuania in Europe Lithuania joined the European Union in 2004, the same year as Estonia and Latvia. However, with Latvia joining the euro in 2014 and Estonia a member since 2011, Lithuania will be last of the Baltic states to join the single currency. All indicators suggest that the economy will meet the strict conditions for entry, including public debt below 60% of GDP and a budget deficit of under 3%, ahead of a proposed entry in 2015. Would you like like to see further integration of EU member states? This will please 61% of Lithuanian businesses who indicate that they would like their country to join the euro. Latvian businesses are only slightly more positive about adopting the single currency (64%). Entry may also come as a bit of surprise to many Lithuanian businesses as only 36% expect the economy to join before 2016. The flipside of course is that more than a third of Lithuanian business leaders (35%) do not want to adopt the euro. Indeed one in ten want the currency union to break up, double the rate in Latvia, and a further 34% What form of integration would you like to see? believe no more countries should join in the near future. Lithuanian businesses are positive about further European integration however; 85% would like to see cooperation between EU member states. This compares to 83% in Latvia and 79% in Estonia. Two in five Lithuanian businesses want to see further economic integration and one in five wants to see a deepening of political ties. For more on these results please look at our recent IBR report: Future of Europe 2013. Estonia Latvia Lithuania eurozone 79 83 85 89 Yes Estonia Latvia Lithuania eurozone 15 5 21 40 68 34 40 66 18 33 14 39 22 5 8 40 Political Economic Industrial Would you like your country to adopt the Euro? (% yes) 64 61 59 56 Legal 20 11 Latvia Lithuania Denmark Poland Sweden Source: Grant Thornton IBR 2013 United Kingdom Source: Grant Thornton IBR 2013 Focus on: Lithuania 7
  8. 8. IBR 2013 methodology The Grant Thornton International Business Report (IBR) is the leading mid-market business survey in the world, interviewing approximately 3,300 senior executives every quarter in listed and privately-held businesses all over the world. Launched in 1992 in nine European countries, the report now surveys more than 12,500 businesses leaders in 45 economies on an annual basis, providing insights on the economic and commercial issues affecting companies globally. The data in this report are drawn from interviews with chief executive officers, managing directors, chairmen and other senior decision-makers from all industry sectors in businesses with 20-249 employees in Lithuania. Q3 data is drawn from 3,300 interviews globally (50 in each of Estonia, Latvia and Lithuania) conducted in September 2013. 2013 data is drawn from over 12,500 interviews (200 in each of Estonia, Latvia and Lithuania) conducted between November 2012 and September 2013. To find out more about IBR, please visit: Dominic King Grant Thornton International Ltd Global research manager T +44 (0)207 391 9537 E Gerli Soosalu Grant Thornton Rimess OÜ Marketing manager T +372 626 4500 E © 2013 Grant Thornton International Ltd. ‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton International Ltd (GTIL) and the member firms are not a worldwide partnership. GTIL and each member firm is a seperate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another’s acts or omissions.