The Lithuanian EconomyMonthly newsletter from Swedbank’s Economic Research Departmentby Nerijus Mačiulis No. 2 • 9 March 2011Not too great expectations The Lithuanian economic sentiment indicator reached its lowest point in the first half of 2009 and has been edging up for more than a year now. However, it still remains close to pre-crisis levels and below the positive area, which indicates dominating pessimistic expectations. The recovery of sentiment and improvement of expectations in different sectors have been far from even. While the services confidence indicator has been positive since the beginning of 2010, construction confidence is still at -40 points. Retail sector confidence was positive during most months of 2010, but dipped into the negative area this year, mainly due to disappointing sales in December. Consumer confidence was increasing steadily for the first half of 2010, but this growth of sentiment has been stalling more recently. Behind this stalling have been bad weather, high heating costs, and soaring food prices. Expectations of even higher inflation, along with a sluggish growth of wages and slowly declining unemployment, are also contributing to a cautious recovery of consumer confidence. Improvement of political climate could have important and significant influence on consumer confidence.Economic sentiment recovery is noticeable, Economic sentiment indicator, Jan 2007 - Feb 2011 (Component weights in parentheses)albeit very uneven 50The economic sentiment indicator bottomed out inApril of 2009 at -39 points. This was the lowest 30value since Statistics Lithuania started keeping 10records in 2002. All components of this indicatorwere well into the negative area, with construction, -10retail trade, and consumers leading the downturn. -30A more rapid recovery of sentiment began in -50January 2010; by February of this year, it had -70reached its highest value since September 2008,when the bankruptcy of Lehman Brothers froze -90credit markets and sent the already declining 2007 2008 2009 2010 2011economy into a tailspin. Economic sentiment Industrial (40%) Construction (5%) Retail trade (5 %) Serv ices (30%) Consumer (20%)The economic sentiment indicator is still in a Source: Statistics Lithuanianegative area and reflects both objective andsubjective peculiarities of Lithuanian marketparticipants. Considering the extent of the economic There are more subtle and less tangible reasonsdownturn (from peak to trough, the economy behind the low (negative) economic sentimentcontracted by 17%), it is hard to expect a rapid indicator. Even during booming years, when realrecovery of sentiment and expectations – structural disposable income was increasing by double digitsunemployment is still at historic highs, inflation is and unemployment was at its low, sentiment wasaccelerating, and domestic demand remains only slightly above zero and reflected the prevailingsubdued. pessimism and skepticism of most market participants. The overly strong focus on negative Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000 E-mail: email@example.com 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 2 • 9 March 2011news in the media and the ongoing upheavals in Industrial confidence indicator, Jan 2008 – Feb 2011the political arena are partly responsible for this 30low-confidence phenomenon. 20Construction confidence will lag behind the 10rest 0Not surprisingly, the overinflated construction sector -10has suffered the hardest hit – at its lowest point, the -20construction confidence indicator read -84, whichcould be described as “can’t get worse.” -30 -40Construction confidence indicator, Jan 2008 – Feb 2011 -50 60 2008 2009 2010 2011 Industrial conf idence Assesment of stocks 40 Production expectations Selling price expectations Export expectations Employ ment expectations 20 Source: Statistics Lithuania 0 -20 Despite the strong recovery in manufacturing, which -40 is expected to reach all-time highs sometime this -60 year, employment expectations became positive only at the beginning of this year. Production and -80 export expectations are also in the positive area, -100 despite the short setback recorded at the end of 2008 2009 2010 2011 2010. Construction conf idence Assement of demand Employ ment expectations Price expectations Demand expectations Delay s in pay ment Amongst the strongest drivers of industrial Source: Statistics Lithuania confidence are price expectations, which in February hit their highest level in three years. This means higher income for industrial companiesAlthough, at the beginning of 2010, confidence (along with higher costs of natural resources), butstarted improving, mainly due to expectations of a does not help competitiveness or consumers of finalcountrywide house renovation program, it goods, whose income is barely increasing.plummeted again once it became obvious that therenovation project had reached a dead end. A very Services confidence has suffered least andearly and extremely cold winter did not help to recovered fastestimprove expectations. The economic downturn has affected the servicesIn the construction sector, the assessment of sector less than the other sectors. Even taking intocurrent demand is still very low; however, at the account the strongly affected financial sector, thebeginning of this year, demand expectations picked smaller drop in confidence can partly be explainedup slightly. There has been a noticeable by the less elastic demand of communications andimprovement in price and employment some other sectors. Also, companies in theexpectations, but as demand remains subdued, we services sector are probably a little less dependentdo not expect a rapid shift of sentiment, and the on fixed costs and could adapt to lower demandconstruction confidence indicator is likely to stay in quicker (by reducing the number of employees).the negative area for the rest of this year. The services confidence indicator was in theIndustrial confidence lags behind the negative area for only 16 months, and its declinesector’s performance was the most benign. It has been in the positive area since the beginning of 2010 and is nowThe industrial confidence indicator plunged rapidly recording the most positive sentiment since theat the beginning of 2009 and, not surprisingly, summer of 2008. The uptrend is expected tostayed at record low levels for more than a year. continue this year, especially considering the quickExport-driven recovery in manufacturing improved recovery in transportation, financial and hotelsentiment quickly – already, by January of 2010 services.export and production expectations had turnedpositive. 2 (4)
The Lithuanian Economy Economic Research Department, Swedbank Nr 2 • 9 March 2011Services confidence indicator, Jan 2008 – Feb 2011 been over. However, sales in the last month of 70 2010 were disappointing (albeit increasing) and caused a quick relapse of confidence in January. 50 Apparently, high expectations caused retailers to 30 overstock – the assessment of the current inventory level spiked in January, whereas expectations of 10 orders in the next two-three months have dropped -10 at a pace seen only during the height of the crisis. Expectations recovered slightly in February, and the -30 outlook for employment in the trade sector is still positive. However, the biggest positive influence on -50 confidence, as in industry, is the high expectation of 2008 2009 2010 2011 price increases. Serv ices conf idence Assesment of situation Demand expectations Price expectations Emply ment expectations Consumer confidence needs positive Source: Statistics Lithuania impetus The consumer confidence indicator has beenUnlike in the industry, construction, and retail negative for more than three years now and, untilsectors, service providers do not expect rapid price the beginning of 2010, was below the -40 mark. Itincreases. Expectations for demand and has improved since, but stabilised at around -25 atemployment also entered the positive area in the the end of the summer and has stayed there since.first two months of 2011. Consumer confidence indicator, Jan 2008 – Feb 2011Retail trade confidence is unexpectedly 100volatile 80Retailers’ expectations correctly signalled the first 60signs of a pickup in domestic demand – in June,confidence become positive after almost two years 40of negative recordings. Three months later, retail 20trade celebrated its first annual increase and has 0been increasing ever since. -20Retail trade confidence indicator, Jan 2008 – Feb 2011 -40 -60 60 2008 2009 2010 2011 40 Consumer conf idence Household f inancial situation Price f orecasts Major purchases f orecast 20 Probability of sav ings Unemploy ment expectations Source: Statistics Lithuania 0 -20 Lithuanian consumers still have few reasons to be -40 cheerful. Unemployment is high and to a great -60 extent it’s structural – even as business creates -80 new working places, the unskilled or those having 2008 2009 2010 2011 outdated and irrelevant competences find little Retail trade conf idence Orders expectations comfort in this development. The increase in Inv entory lev el Business activ ity expec. average wages will be slow and probably not Employ ment expectations Price expectations enough to offset increasing prices. Thus, the Source: Statistics Lithuania purchasing power of the average household is falling. Add to this the unstable politicalHowever, the confidence in the growth of environment, riddled with corruption scandals (bothhousehold consumption might have been fake and real), threats of impeachments, and emptyprematurely strong. After a few months of positive promises, and you have a perfect breeding groundannual increases in retail trade, retailers were for negative consumer confidence.expecting exceptionally strong sales in the Nevertheless, in some aspects households areDecember – pre-Christmas period, thinking that two starting to feel better – the assessment and forecastyears of savings and ascetic behaviour must have of households’ financial situation and general 3 (4)
The Lithuanian Economy Economic Research Department, Swedbank Nr 2 • 9 March 2011economic conditions are improving, and The government has few tangible instruments tounemployment expectations are dropping rapidly. boost consumer confidence – public finances areConsumer confidence is likely to be increasing this still strained, and there is no room to cut taxes oryear, but it would take a strong impetus to push it increase social benefits. However, a more positiveinto the positive area. Amongst the strongest rhetoric and fewer pointless clashes between theanchors of current expectations are rising consumer government and the opposition wouldn’t hurt.prices (and future increases are well reflected in At the end of the day, the linkage between theinflation expectations). This affects mostly economy and political climate is stronger than whathouseholds of lower-than-average income, where is often realized. Building household confidence byalmost half of the consumer basket consists of focusing on growth oriented policies could make aexpenses on food and transport – two groups of difference between a slow and a fast recovery inproducts most affected by upheavals North Africa Lithuania.and the Middle East. Nerijus MaciulisSwedbankEconomic 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 firstname.lastname@example.org 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)