The Lithuanian EconomyMonthly newsletter from Swedbank’s Economic Research Departmentby Nerijus Mačiulis No. 04 • 2011 06 30Investments drive growth, external imbalances are slightly wider In the first quarter of 2011, the biggest contribution to GDP growth came from investments, followed by continued restocking and recovering domestic demand. The rapid growth is partially explained by a very low base – in the first quarter of last year, the index of gross fixed capital formation dipped to its lowest level in the last decade. As the population dwindles, the high potential GDP growth can be sustained by investments and increasing productivity. Both private and public sectors increased investments in fixed tangible assets, which in the first quarter of 2011 grew by 44% over the same period a year ago. As we forecast in our economic outlook, the private sector significantly increased its investments, especially in equipment, machinery, and transport vehicles. This trend is likely to continue this year and the next. Rising imports of investment goods and recovering domestic consumption will have a negative impact on the foreign trade balance. As there is already a hint of new imbalances, long-term growth should rely more on investments and exports, rather than consumption.Investments drive growth in both short and long Admittedly, this whopping increase follows theterm worst quarter (Q1 2010) of the last decade, when the investments index dropped below the 2000Gross fixed capital formation in the first quarter of level. Nevertheless, there are good reasons tothis year increased by 41.0% over the same period believe that investments will keep increasing.last year, confirming our forecast that growth in2011 will be driven by investments. One important reason behind the strong pickup in investments this year is related to the upcoming Investments (excluding inventories), 2000=100 European Basketball Championship and to the 300 leisure infrastructure projects associated with it. Alytus Arena was opened at the beginning of this 260 year, and two more big projects – Svyturio Arena in Klaipeda and Zalgiris Arena in Kaunas – will be 220 finished and start operating this summer. 180 Capacity utilisation in manufacturing, currently at 71%, is still below the previous peak of 75%, 140 reached in the third quarter of 2007. However, 100 manufacturers of wood products, furniture, and wearing apparel have already reached or exceeded 60 previous highs. Even in sectors where 2005 2006 2007 2008 2009 2010 2011 manufacturing is not yet constrained by capacity Index Index, 4 quarters mov ing av erage utilisation, increasing exports and recovering domestic demand will necessitate capital Source: Statistics Lithuania investments. Furthermore, even if capacity is not the issue, three years of “investment abstinence” Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000 E-mail: firstname.lastname@example.org www.swedbank.com Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720 Nerijus Mačiulis + 370 5 258 2237. Lina Vrubliauskienė +370 5 258 2275.
The Lithuanian Economy Economic Research Department, Swedbank Nr 04 • 2011 06 30has rendered some manufacturers technologically Investment in tangible fixed assets, billion LTLbackwards and inefficient. 7 160 6 140This year, Statistics Lithuania has conducted apopulation and housing census that, somewhat 5 120unexpectedly, reveals that Lithuania has only 3.05 100 4million inhabitants (preliminary estimate). This is 80well below the 3.25 million inhabitants at the 3 60beginning of this year and the 3.5 million that had 2been estimated at the beginning of the last decade. 40As the Lithuanian population and its labour force 1 20dwindles rapidly – due to both emigration and the 0 0low birth rate – the economy as a whole will have to 2005 2006 2007 2008 2009 2010 2011rely more on another factor of production – physical Others 1capital. Acquisition of equipment, machinery , v ehicles Construction and repairs Index, y oy (right scale) Source: Statistics LithuaniaOver the past 15 years, average GDP growth inLithuania was 4.6%, third highest in EU and onlyslightly lower than Estonia’s and Ireland’s 5.0%. But Over the same period, both the private and publicto sustain potential output close to 5%, Lithuania sectors increased their investments significantly.needs to offset its population and labour force loss. Furthermore, the private sector invested twice asGross fixed capital formation averaged 22.5% much as the public sector. Given the lowerduring the past 15 years and 27.7% in the 5 years efficiency of public sector investments, lessafter EU accession. However, a big part of these crowding out by public sector and a more activeinvestments were in residential real estate – useful, private sector are positive developments.but not very productive capital. In the first quarter,gross fixed capital formation reached 22.3% of In the first quarter, the private sector was the mainGDP, above its 2009 low of 14.3% but still below contributor to the growth of investment in equipmentthe post-EU accession average. and machinery – its nominal annual growth exceeded 58%. Overall, 78% of all investments inInvestments in machinery and equipment are machinery and equipment were made by theessential private, not the public sector. Growth in construction and the repair of buildings and civil engineeringIn the first quarter of this year, investment in structures were, on the other hand, still dominatedtangible fixed assets increased by 44.0% over the by the public sector.same period a year ago. The acquisition of Investment in tangible fixed assets, 1Q 2011, m LTLequipment, machinery, and transport vehicles greweven faster – nominal growth (at current prices) Real estateexceeded 52%. These kinds of investments have Electricity , gasthe biggest impact on productivity and Manuf acturingcompetitiveness, and thus are essential for export- Transportation and storagedriven growth. Public administration Wholesale and retail trade Water supply Inf ormation and communication Health and social work Construction Prof essional, scientif ic Agriculture, f orestry Other 0 100 200 300 400 Source: Statistics Lithuania1 You can read more about Lithuania’s productivity inour recent analysis: Due to the aforementioned reasons, the real estatehttp://www.swedbank.lt/lt/previews/get/2417/130674583 sector invested the most (LTL 392 million) in the9_Swedbank_Analysis_LT_Productivity_May2011.pdf first quarter, followed closely by electricity and gas, manufacturing, and transportation and storage. The 2 (4)
The Lithuanian Economy Economic Research Department, Swedbank Nr 04 • 2011 06 30latter sector benefitted from rapidly increasing Imports, billion LTLexports and imports, as well as by the growing 8trade between Western Europe and CIS countries. 7In the first quarter, manufacturers invested LTL 272 6million, 59.5% more than in the same period last 5year, but still 62.3% less than in 2008. Among thebiggest investors were producers of food, wood, 4and metals. As mentioned above, manufacturers 3are not yet constrained by production capacities; 2however, this is bound to change in the near future. 1Growing imports will cause external imbalances 0 2007 2008 2009 2010 2011 Capital goods Intermediate goodsThe rapid growth of exports of goods and services, Consumption goods Otherswhich began at the start of last year, continued in Source: Statistics Lithuaniathe first months of 2011. Annual growth peaked inJanuary, at 54.2%. Since then, it has decelerated a Capital goods make up 11%, consumption goodsbit (mainly due to the much higher comparative 21%, and intermediate goods 64% of total imports.base), and in April exports were 22.3% higher than This import structure has changed noticeably sincea year ago. 2007, when imports of intermediate goods Growth of exports and imports of goods and services (at constituted 54% and capital goods 18% of total current prices), yoy % imports. Recovering investment in fixed tangible assets will continue to boost imports of capital 60% goods, as most of the needed machinery, equipment, and transport vehicles are not produced 40% in Lithuania. 20% The increasing import share of intermediate goods relates to the rapid growth in manufacturing, where 0% these intermediate goods are processed and exported or consumed locally. -20% Current account and foreign trade balance, % of GDP -40% 15% -60% 10% 2007 2008 2009 2010 2011 5% Exports Imports Source: Bank of Lithuania 0% -5% -1.1% -1.5% -2.3%Although domestic demand was relatively weak,imports were increasing at a pace similar to exports’ -10%– in January, it was 56.7% and in April 23.6% -15%higher than a year ago. Exports have already -20%exceeded pre-crisis records, and imports are rapidly -18.4%approaching those levels. -25% 2006 2007 2008 2009 2010 2011 Current account balance, % of GDP Goods and serv ices balance, % of GDP Source: Bank of Lithuania Although household consumption increased by 5.5% in the first quarter of this year, it still lags behind exports. In May, retail trade continued its strong growth, increasing by 23.8% over the same period last year. Retail trade except transport 3 (4)
The Lithuanian Economy Economic Research Department, Swedbank Nr 04 • 2011 06 30vehicles also continued growing; in May, it was The trade deficit is nowhere near the record of –6.5% higher than a year ago. 18.4% reached in the first quarter of 2008, but it has worsened noticeably compared with theThe rising household consumption will inevitably corresponding quarters of 2009 and 2010. Aslead to higher imports of consumption goods, household disposable income will grow, the gap willespecially as consumers will be buying more non- widen further. A call of warning is still premature,necessities (household appliances, information and but, as recent history shows, the trade deficit is onecommunication equipment, etc). This, in turn, will of the best indicators of bubbles and imbalancesfurther widen the trade deficit. and should be watched closely. Nerijus MačiulisSwedbankEconomic 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 email@example.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 5 268 4275. 4 (4)