The Lithuanian EconomyMonthly newsletter from Swedbank’s Economic Research Departmentby Nerijus Mačiulis, Vaiva Šečkutė No. 9 • 2 December 2011 Industry stagnates; retail trade remains resilient Industrial production decreased by 1.3% in October compared with the corresponding period a year ago, while manufacturing grew at a meagre 0.5%. This could have been the result of an actual drop in demand in foreign markets, but more likely the contraction was caused by adjusted inventories. Retail trade growth has been somewhat more resilient – in October, it was still 9.5% higher than a year ago. However, depressed consumer confidence and a slower increase in wages, as well as increasing unemployment expectations, will deter spending. After two years of surpluses, the current account slipped back into deficit and was 1.6 % of GDP during the first three quarters this year. Its further increase is likely to be limited due to the more cautious behaviour of consumers and possibly postponed investments by companies. —and not the actual contraction in current orders--Export- dependent manufacturing falls may be enough for some companies to startNext to Estonias, Lithuania’s economic reducing their inventory levels and adjust them toperformance this year has been unmatched in the slower-growth or even contraction periods.EU. However, lingering uncertainty and forecasts of Industrial confidence had been worsening for fourimminent recession in the EU are now affecting not months until November, when it increased slightlyonly confidence indicators, but the real economy as from -20 to -19. This is the same as the level of thewell. EU countries are the main destination for beginning of 2010.exports of Lithuanian-origin goods. In the absenceof clearer prospects regarding the resolution of the Expectations and industrial production change, %euro area debt crisis and its economy, Lithuanian 35manufacturing growth is ebbing. 30 25In October, industrial production slipped into 20negative growth after having increased for 19 15consecutive months since March 2010. It 10 5decreased by 1.3% compared with the same period 0a year ago and by 3.6% compared with the -5previous month (seasonally adjusted). Seasonally -10adjusted monthly growth in manufacturing was also -15 -20negative; however, annual growth remained -25positive– output was 0.5% higher than in October -302010. Some of the sharp decline in the annual 2010 2011 Industrial conf idence Industry , y oygrowth of industrial production and manufacturing Production expectations Assesment of stockscan be attributed to the base effect (industry has Manuf acturing (excl.ref ined prod.), y oybeen expanding rapidly since the beginning of Source: Statistics Lithuania2010). Industrial production will not grow as strongly asOn the other hand, more and more businesses are before. In addition to deteriorating conditions in thelosing their confidence regarding the prospects for main export markets, this slower growth will beexternal demand and expect to produce less in the influenced by the disappearance of the base effect.immediate future. Expectations of weaker demand The adjustment of inventory levels will push down 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 2582237 Lina Vrubliauskienė +370 5 258 2275. Vaiva Šečkutė +370 5 258 2156.
The Lithuanian Economy Economic Research Department, Swedbank No. 9 • 2011 12 02production growth in the near future as well. Wage and employment growth ratherHowever, Lithuanian competitiveness has limitedstrengthened significantly during the last threeyears. Although the process of internal devaluation This year, unemployment has been decreasingis over, in the third quarter of this year real labour while the activity rate has been increasing.productivity continued increasing at a much faster Unemployment fell to 14.8% in the third quarter,pace (7.5%) that nominal wages (0.4%). This while the activity rate of 15-64-year olds increasedindicates that even with the recession in the euro to 72.3%. Long-term unemployment peaked in thearea, contraction in Lithuanian manufacturing first quarter but fell from that period by 0.7should not be severe. percentage point to 8% in the third quarter.Retail trade remains somewhat more Uncertainty about demand in foreign and local markets will limit the creation of new jobs. Also, theresilient continued increase in the activity rate could be oneEven though retail and consumer confidence has more reason for the slower decrease inbeen falling for a few months now, retail trade has unemployment. There is also not much room for acontinued to grow at a near-record pace. more significant increase in wages either.Retail trade growth, except for motor vehicles, The current decrease in the growth rate of grossdecreased to 9.5% in October, down from an nominal wages can be partly explained by newlyannual growth of 9.9% in the third quarter of this employed persons, who may be earning less thanyear. The growth of retail sales of food, beverages, the average wage. On the other hand,and tobacco also maintained a rapid pace (3.9%). unemployment expectations have increased and,Only the growth of retail sales of automotive fuels consequently, employee bargaining power hasdecreased more significantly (from 14% in weakened. Companies most likely will be carefulSeptember to 6.3% in October). about increasing the number of workers, while there will be no mass increases in wages of currentAnnual change in retail trade, %, and confidence indicators employees. Professionals in some sectors (e.g., engineers in manufacturing or IT specialists), 30 however, may experience selective wage increases 20 due to labour force shortages in those areas. 10 0 Unemployment, wage growth -10 -20 25% -30 -40 20% -50 15% -60 10% 2010 2011 Retail trade conf idence indicator Consumer conf idence indicator 5% Retail trade Retail trade except of motor v ehicles and motorcy cles Retail sale of f ood, bev erages and tobacco 0% Retail sales of automotile f uels Source: Statistics Lithuania, Swedbank -5%Domestic demand has become a more important -10%source of economic growth. Consumption has been 2007 2008 2009 2010 2011the main contributor to GDP growth since the Unemploy ment rate Gross nominal wage, y oysecond quarter this year (4 percentage points in the Net real wage, y oy Source: Statistics Lithuamiasecond quarter and 3.5 percentage points in thethird). However, households cannot remain isolated On the other hand, the number of job vacanciesfrom external factors for long. Lower growth of and its rate (the ratio of job vacancies to occupiedexports and manufacturing will cause slower posts) has been increasing; in the third quarter ofincreases in wages, and there will be fewer new this year, it reached the level at the end of 2008,jobs. Uncertainty about future income may cause when unemployment was 7.9%. The Beveridgehouseholds to increase savings and reduce curve has shifted to the right during the last fewconsumption. quarters. This means that unemployment could have fallen more by now if the labour market were more efficient and there were no mismatches of 2 (4)
The Lithuanian Economy Economic Research Department, Swedbank No. 9 • 2011 12 02skills. However, structural unemployment has The income balance, which became positive inbecome more pronounced in recent quarters as the 2009 due to losses of foreign capital companies, fellgap between labour market needs and the skills of back into a deficit of 3.7% in the first three quartersthe unemployed has widened. of this year. Reinvested earnings from FDI increased in line as well. However, the total FDICurrent account deficit remains at relatively flow in Lithuania will not reach the pre-crisis levellow level this year.Although the current account was in surplus for the Capital and financial account, except for official reserves,last two years, during the first nine months of this LTL myear it fell back into deficit (1.6% of GDP). However,despite rapidly increasing household consumption, 15000 Otherexternal imbalances are not building up – in the inv estmentsthird quarter of this year, the current account deficit 10000 6449contracted to 0.9% of GDP. 2678 4821 Portf olio 1156 inv estments 2227The biggest source of the current account deficit is 5000 2949 1761 967 2537 1421the ever-negative balance of goods. In the first half 3130 FDI (reinv ested 2041 2552 2015of this year, the trade deficit (of goods) was at 0 -1508 earnings)6.1%, but contracted rapidly to 2.9% in the third -3943 -1026quarter. Since Lithuania is usually a net exporter of -8517 FDI (other -5000 capital)services, the deficit of goods and services is slightly -9832lower-- in the third quarter, it was at 2.1% of GDP. -10000 FDI (equity )Lithuanian companies have become significantlymore competitive, and this is reflected in a much -15000smaller foreign trade deficit than in the pre-crisis 2008 2009 2010 2011 Capital accountperiod. Furthermore, one of the main reasons of Source: Bank of Lithuaniahuge current account deficit in the pre-crisis period The current account deficit is at present notwas real estate and consumption bubble, which is financed by foreign credit, which was the mainclearly not the case any more. source in pre-crisis years, but rather by FDI and theThe growth of the current account deficit will be capital account surplus. Most of the FDI this yearlimited by the more cautious behaviour of has came in the form of intercompany lendingconsumers and possibly by companies postponed (parent companies providing non-equity capital).investment plans. However, the Lithuanian The heavy outflow of other investments in 2009 andeconomy still has a long way to go before it 2010 was caused by a severe credit crunch –becomes a net exporter of goods. subsidiary banks returned short- and long-termThe surplus of current transfers keeps increasing loans to their parent banks. This was offset byevery year due to the growing number of emigrants heavy government borrowing, as indicated by theand their remittances. This year, net current positive flow of portfolio investments.transfers may exceed LTL 5 billion. The ongoing sovereign debt crisis is increasing borrowing prices and having a ripple effect on theCurrent account components, % of GDP confidence of business and households. The EU 10.0 countries are the main markets for Lithuanian 7.5 exports; therefore, the risks of a contraction in 4.4 4.8 5.0 4.4 demand have increased. 2.5 2.2 1.3 3.5 1.3 1.9 2.6 0.0 So far, domestic household confidence has -3.2 -4.6 -4.9 -2.5 wobbled, but household spending has remained -5.0 -12.9 -2.3 -3.7 resilient. However, companies are expected to be -7.5 -10.0 cautious and invest and hire less, which will hurt -12.5 employment and domestic demand. All this implies -15.0 -3.4 much slower growth in 2012, lower growth in tax -17.5 income, and the need to continue fiscal austerity if -20.0 the government wants to stick to the Convergence 2008 2009 2010 2011(I-III) Programme and the target of 2.8% budget deficit. Goods balance Serv ices balance Income balance CAD as % of GDP Current transf ers This is a challenge, considering the upcoming Source: Bank of Lithuania, Swedbank parliamentary elections. However, abandoning 3 (4)
The Lithuanian Economy Economic Research Department, Swedbank No. 9 • 2011 12 02fiscal austerity and increasing the budget deficit higher interest rates, or worse, of being locked outtarget would clearly be a worse alternative than of the markets.raising taxes or cutting spending. In the face ofinvestor uncertainty and risk aversion, looser Nerijus Mačiulisbudget deficit targets may come at the price of Vaiva ŠečkutėSwedbankEconomic 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 5 258 2275.Vaiva Šečkutė, +370 5 258 2156. 4 (4)