The Lithuanian Economy - No 8, November 15, 2011: Strong economic growth expected to decelerate

1. The Lithuanian Economy
Monthly newsletter from Swedbank’s Economic Research Department
by Nerijus Mačiulis, Vaiva Šečkutė No. 8 • 15 November 2011
Strong economic growth expected to decelerate
 Lithuania’s annual GDP growth accelerated further and reached 6.6% in the
third quarter of this year. However, growth will moderate in the last quarter
and in 2012 as the global economy slows and growth expectations worsen.
 In September, double-digit growth in retail trade (except for motor vehicles)
continued. However, annual industrial production growth decreased during
2011 from 14.6% in the first quarter to 6.9% in the third.
 Growth expectations have been worsening for a few months as the global
turbulence created by the ongoing euro zone sovereign debt crisis is here to
stay for some time. Decreased foreign demand will have a negative impact
on the export sector, while a loss in business and household confidence will
lower the potential of a further domestic demand increase.
quarter of 2008, when the Lithuanian economy
Rapidly increasing GDP still below pre- reached its peak.
crisis level
Despite unfavourable global developments,
Retail trade growth continues despite lower
Lithuania has until now succeeded in sustaining consumer confidence
exceptionally strong economic growth. Even though Household consumption has continued fuelling
seasonally adjusted quarterly growth this year economic growth. Strong retail trade growth
decelerated from 2.2% in the first quarter to 1.3% in continued in September despite worsening
the third quarter, annual growth continued to expectations. In September, annual growth of retail
increase over the same period from 5.9% to 6.6%. trade, except for motor vehicles, reached 10.6% -
the fastest pace this year.
Economic growth, yoy, %
The annual growth of food, beverages, and tobacco
30
increased from 1.9% in August to 4.2% in
20
7.3
September - a pace of growth not reached in more
4.8
5.7 0.9 5.9 6.5 6.6 than three years. It is likely that this strong increase
10
1.9 0.8 in annual growth was at least partially influenced by
0 introduction of cash registers in closed markets,
-10
which did not boost actual consumption, but
-2.3 improved official statistics. The annual growth of
-0.9
-20 total retail trade already reached a record high in
-30 -14.4 June, when it increased by 25.6%. As the holiday
-13.8
-15.8 -15.3 season was over, growth of retail trade of
-40 automotive fuels slowed from 15.6% in August to
2008 2009 2010 2011 12.7% in September.
Household consumption Gov ernment consumption
Inv estment Inv entories
Net export GDP growth It is not likely that such a pace of growth in retail
Source: Statistics Lithuania, Swedbank trade will continue, as household sentiment has
been adjusted downwards for the last few months.
Nevertheless, GDP (chain-linked volume, During the first nine months of this year, retail trade,
seasonally and working-days adjusted) has not yet except for motor vehicles, was on average 2.9%
reached its pre-crisis level. At the third quarter, lower than the 2005 average. Retail trade of
output was still 8.3% lower than in the second
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. 8 • 2011 11 15
automotive fuels was 4.1% higher on average, (-38) confidence level was recorded for the hardest-
whereas retail sales of food, beverages, and hit sector, construction. Its confidence has been
tobacco were 12.9% lower on average, indicating decreasing rapidly since July, after a strong
that consumption of necessities has not picked up recovery since the beginning of this year. The
significantly this year. somewhat resilient confidence level for services
(24) remains the highest, probably due to its more
Retail trade confidence in October slipped back to a
indirect relationship to foreign markets and less
negative figure after decreasing for four months. It
elastic demand.
fell from 13 in June, when it had reached the pre-
crisis level, to -1 in October. Retail companies Confidence indicators
became more pessimistic about the future of their
business activities, though employment (at 32 50
percentage points in October) and price (11
percentage points) expectations1 have been 30
somewhat more stable and positive for the last 10
three months.
-10
Consumer confidence, which had been weakening -30
since August, in October fell to its lowest level since
the beginning of this year (-23). Consumer -50
confidence has been depressed lately mainly due to -70
a decreasing confidence in the general economic
situation (-16). Households also think that it is a -90
less favourable time to make any major purchases, 2008 2009 2010 2011
Economic sentiment Industrial (40%)
and it has also become harder to save. In addition Construction (5%) Retail trade (5 %)
to uncertainty regarding euro zone economic Serv ices (30%) Consumer (20%)
Source: Statistics Lithuania
prospects, the decline in consumer confidence has
also been influenced by the start of the heating A larger number of construction sector companies
season, which was heralded to be the most has become pessimistic about future demand and
expensive so far. prices. The share of companies that plan to lay off
their employees during the next two-three months
Annual change in retail trade, %, and confidence indicators increased from 26% in September to 41% in
October.
30
20
The industrial confidence indicator has been the
10
hardest hit as manufacturers are the most
susceptible to potential shocks in foreign demand.
0
After being positive for four months earlier this year.
-10
It has been decreasing rapidly since August and
-20
reached -20 in October - similar to the level at the
-30
beginning of 2010. Production expectations fell,
-40
together with lower exports and selling price
-50
expectations.
-60
2008 2009 2010 2011 Industrial production growth is falling
Retail trade conf idence indicator
Consumer conf idence indicator
Retail trade Although industrial production has been recovering
Retail trade except of motor v ehicles and motorcy cles
Retail sale of f ood, bev erages and tobacco rapidly during 2010 and 2011, this year it was still
Retail sales of automotile f uels below its peak level. During the first three quarters
Source: Statistics Lithuania, Swedbank
of this year, industrial production was 4.8% lower
The overall economic confidence indicator, which than during the corresponding three quarters of
had become positive and reached its pre-crisis level 2008, and 5.7% lower in the third quarter this year
than the industrial production peak in the second
in the middle of 2011, has been decreasing since
quarter of 2008. It is not likely that industrial
August. It declined to -7 in October. The lowest
production, which contracted by 14.6% in 2009, will
reach previous highs this year.
1
Employment and price expectations are Manufacturing, except for refined petroleum
measured as the difference between the percentage of products, during the first three quarters of this year
positive and the percentage of negative answers. was only 0.7% below the 2008 level, as it increased
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3. The Lithuanian Economy
Economic Research Department, Swedbank
No. 8 • 2011 11 15
by 15.4% during three quarters of this year (-27.8% to 47.1%) steadily increased.
compared to the same period in 2010. Total
Manufactures of furniture, chemicals,
industry grew by 10.6% during the first three
pharmaceuticals, rubber and plastics, wearing
quarters, whereas the manufacturing sector
apparel, machinery and equipment and their
enjoyed a 13.5% growth.
installation, as well as of computer, electronic and
The electricity and gas supply has been decreasing optical, and electrical equipment, have increased
for the fourth consecutive year – by -0.4% in 2008, above their 2008 levels, whereas, food, wood, and
-5.7% in 2009, -4% in 2010, and -11.1% in the first metal products, textiles, and some others have
three quarters of this year). This may indicate remained below previous peaks.
higher energy efficiency.
Largest manufacturing sectors, yoy growth at constant 2005
Industrial production this year is only 2.6% lower prices, 2008 Q1- 2011 Q3
than during the corresponding three quarters of
2008, if the electricity, gas, and water supply are 50%
excluded. Industrial production, except for the 40%
electricity, gas and water supply, is likely to reach 30%
its peak in the last quarter of this year. 20%
10%
The annual growth of industrial production has been
decelerating this year, from 14.6% in the first 0%
quarter to 6.9% in the third. The growth of -10%
manufacturing, except for petroleum products, has -20%
also decreased, but remains relatively stronger. -30%
-40%
Industrial production and manufacturing, 1Q 2007-3Q 2011 2008 2009 2010 2011
(Left scale at constant 2005 prices, m LTL; Right scale – yoy Food products
Chemicals and chemical products
growth at constant 2005 prices) Furniture
Wood
Rubber and plastic products
14,000 40% Source: Statistics Lithuania, Swedbank
12,000 30%
10,000 20%
The strongest growth has been recorded in the
furniture (32.2% in the third quarter of this year) and
8,000 10% metal products (31.1%) sectors.
6,000 0%
The fastest -growing manufacturing sectors, yoy growth at
4,000 -10% constant 2005 prices, 2008 Q1- 2011 Q3
2,000 -20%
80%
0 -30%
2007 2008 2009 2010 2011 60%
Mining and quarry ing
Electricity , water suply 40%
Ref ined petroleum products
Manuf acturing (excl.ref ined products) 20%
Manuf acturing (excl.ref ined prod.), y oy (rs)
Industry , y oy (rs) Source: Statistics Lithuania 0%
-20%
In food manufactures, which, except for refined
petroleum products, are the biggest manufacturing -40%
sector, annual growth decelerated from 11.5% in -60%
the first quarter to 4.9% in the third quarter. 2008 2009 2010 2011
Furniture
The growth of most product groups has been Metal products
Computer, electronic and optical products
decelerating this year. From the first quarter to the Paper and paper products
third quarter, the annual growth of manufactures of Source: Statistics Lithuania, Swedbank
metal products decreased from 55.1% to 31.1%;
textiles fell from 53.9% to 15.1%, electrical The debt crisis in the euro zone, subsequent
equipment from 30.2% to 10.7%, motor vehicles, austerity measures, and rapidly deteriorating
trailers, and semi-trailers from 3 times to 18.1%, consumer and business confidence are likely to
and pharmaceuticals from 41.0% to 10.3%. Over cause a slowdown in manufacturing, which is
this period, only the growth of machinery and largely export driven.
equipment (3.1% to 3.9%) and of their installation
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4. The Lithuanian Economy
Economic Research Department, Swedbank
No. 8 • 2011 11 15
In September, exports of goods produced in foreign markets with only 10% to 25% of production
Lithuania increased by 29.9%, compared with the sold in Lithuania.
same month a year ago, and reached an all-time
However, even domestic consumption can be
high of LTL 4.37 billion. In the nine months of this
significantly weakened by adverse developments in
year, compared with the same period in 2010, these
the global and euro zone economic environment -
exports increased by 29.7%.
as suggested by the rapid decline in consumer
Total exports also reached their all-time high of LTL confidence. Rising unemployment expectations and
6.41 billion in September, as they increased by the fear of a second recession can nudge
29.2% per year. Exports in goods increased by household to further increase their savings and
35.1% in the first nine months of this year. reduce consumption. Household savings however
Annual growth of exports is expected to decelerate were around 8% in 2009 and 2010, well above long
further in the final quarter of this year and 2012. We term average of 2.5%. Although still below EU
still expect real growth of exports to be solid 5% average of some 12%, Lithuanian household
next year, as 2009-like collapse in international savings probably have little room to go up.
trade is not likely. This, however may change if euro Some business investments, on the other hand, in
zone countries are hit by non-orderly defaults and the face of higher uncertainties and potentially
more serious shocks to demand. weaker demand are almost certain to be at least
Household consumption started recovering only at postponed. This is unfortunate development, as
the end of 2010 and is becoming more important for companies have been investing very little in 2009
Lithuania’s economic growth; thus, the growth of and 2010 and all the gains in productivity were due
some manufacturing sectors could continue on the to lower employment. As employment will pick up
back of domestic demand. Producers of beverages and wages will continue to converge with EU
export only one sixth of their production, whereas average, sustained increase in efficiency and
slightly more than half of the food production is productivity can be achieved only through higher
exported. Industries producing textiles, wearing investments.
apparel, paper and its products, furniture and other
wood products are much more dependent on Nerijus Mačiulis
Vaiva Šečkutė
Swedbank
Economic Research Department Swedbank’s monthly newsletter The Lithuanian Economy is published as a service to our
SE-105 34 Stockholm customers. We believe that we have used reliable sources and methods in the preparation
Phone +46-8-5859 1028 of the analyses reported in this publication. However, we cannot guarantee the accuracy or
ek.sekr@swedbank.com completeness of the report and cannot be held responsible for any error or omission in the
www.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 for
Legally responsible publisher
losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’s
Cecilia 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.
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