The Lithuanian Economy - No 9, December 2, 2011
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Industrial production in Lithuania decreased by 1.3% in October compared to the previous year, indicating stagnation in the industry sector. However, retail trade growth remained resilient at 9.5% higher than the previous year. Unemployment has been decreasing while wages have grown only modestly. Deteriorating consumer confidence and expectations of weaker external demand signal that industrial production and domestic spending growth will slow in the coming months.
The Lithuanian Economy - No 9, December 2, 2011
- 1. The Lithuanian Economy Monthly newsletter from Swedbank’s Economic Research Department by 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 start Next to Estonia's, Lithuania’s economic reducing their inventory levels and adjust them to performance 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 four imminent recession in the EU are now affecting not months until November, when it increased slightly only confidence indicators, but the real economy as from -20 to -19. This is the same as the level of the well. EU countries are the main destination for beginning of 2010. exports of Lithuanian-origin goods. In the absence of clearer prospects regarding the resolution of the Expectations and industrial production change, % euro area debt crisis and its economy, Lithuanian 35 manufacturing growth is ebbing. 30 25 In October, industrial production slipped into 20 negative growth after having increased for 19 15 consecutive months since March 2010. It 10 5 decreased by 1.3% compared with the same period 0 a year ago and by 3.6% compared with the -5 previous month (seasonally adjusted). Seasonally -10 adjusted monthly growth in manufacturing was also -15 -20 negative; however, annual growth remained -25 positive– output was 0.5% higher than in October -30 2010. Some of the sharp decline in the annual 2010 2011 Industrial conf idence Industry , y oy growth of industrial production and manufacturing Production expectations Assesment of stocks can be attributed to the base effect (industry has Manuf acturing (excl.ref ined prod.), y oy been expanding rapidly since the beginning of Source: Statistics Lithuania 2010). Industrial production will not grow as strongly as On the other hand, more and more businesses are before. In addition to deteriorating conditions in the losing their confidence regarding the prospects for main export markets, this slower growth will be external 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: [email protected] 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. 9 • 2011 12 02 production growth in the near future as well. Wage and employment growth rather However, Lithuanian competitiveness has limited strengthened significantly during the last three years. Although the process of internal devaluation This year, unemployment has been decreasing is 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 increased indicates that even with the recession in the euro to 72.3%. Long-term unemployment peaked in the area, contraction in Lithuanian manufacturing first quarter but fell from that period by 0.7 should 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, the resilient continued increase in the activity rate could be one Even though retail and consumer confidence has more reason for the slower decrease in been falling for a few months now, retail trade has unemployment. There is also not much room for a continued 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 gross decreased to 9.5% in October, down from an nominal wages can be partly explained by newly annual growth of 9.9% in the third quarter of this employed persons, who may be earning less than year. 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 has decreased more significantly (from 14% in weakened. Companies most likely will be careful September to 6.3% in October). about increasing the number of workers, while there will be no mass increases in wages of current Annual 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 2011 the main contributor to GDP growth since the Unemploy ment rate Gross nominal wage, y oy second quarter this year (4 percentage points in the Net real wage, y oy Source: Statistics Lithuamia second quarter and 3.5 percentage points in the third). However, households cannot remain isolated On the other hand, the number of job vacancies from external factors for long. Lower growth of and its rate (the ratio of job vacancies to occupied exports and manufacturing will cause slower posts) has been increasing; in the third quarter of increases 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 Beveridge households to increase savings and reduce curve has shifted to the right during the last few consumption. 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)
- 3. The Lithuanian Economy Economic Research Department, Swedbank No. 9 • 2011 12 02 skills. However, structural unemployment has The income balance, which became positive in become more pronounced in recent quarters as the 2009 due to losses of foreign capital companies, fell gap between labour market needs and the skills of back into a deficit of 3.7% in the first three quarters the unemployed has widened. of this year. Reinvested earnings from FDI increased in line as well. However, the total FDI Current account deficit remains at relatively flow in Lithuania will not reach the pre-crisis level low 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 m year it fell back into deficit (1.6% of GDP). However, despite rapidly increasing household consumption, 15000 Other external imbalances are not building up – in the inv estments third quarter of this year, the current account deficit 10000 6449 contracted to 0.9% of GDP. 2678 4821 Portf olio 1156 inv estments 2227 The biggest source of the current account deficit is 5000 2949 1761 967 2537 1421 the ever-negative balance of goods. In the first half 3130 FDI (reinv ested 2041 2552 2015 of this year, the trade deficit (of goods) was at 0 -1508 earnings) 6.1%, but contracted rapidly to 2.9% in the third -3943 -1026 quarter. Since Lithuania is usually a net exporter of -8517 FDI (other -5000 capital) services, the deficit of goods and services is slightly -9832 lower-- in the third quarter, it was at 2.1% of GDP. -10000 FDI (equity ) Lithuanian companies have become significantly more competitive, and this is reflected in a much -15000 smaller foreign trade deficit than in the pre-crisis 2008 2009 2010 2011 Capital account period. Furthermore, one of the main reasons of Source: Bank of Lithuania huge current account deficit in the pre-crisis period The current account deficit is at present not was real estate and consumption bubble, which is financed by foreign credit, which was the main clearly not the case any more. source in pre-crisis years, but rather by FDI and the The growth of the current account deficit will be capital account surplus. Most of the FDI this year limited by the more cautious behaviour of has came in the form of intercompany lending consumers and possibly by companies' postponed (parent companies providing non-equity capital). investment plans. However, the Lithuanian The heavy outflow of other investments in 2009 and economy 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-term The surplus of current transfers keeps increasing loans to their parent banks. This was offset by every year due to the growing number of emigrants heavy government borrowing, as indicated by the and 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 the Current 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)
- 4. The Lithuanian Economy Economic Research Department, Swedbank No. 9 • 2011 12 02 fiscal austerity and increasing the budget deficit higher interest rates, or worse, of being locked out target would clearly be a worse alternative than of the markets. raising taxes or cutting spending. In the face of investor uncertainty and risk aversion, looser Nerijus Mačiulis budget deficit targets may come at the price of 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 [email protected] 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. 4 (4)