The Lithuanian Economy

Monthly newsletter from Swedbanks Economic Research Department by Vaiva ekut No. 8 18 December 2012

Good export performance, but weaker expectations

Annual GDP growth increased to 4.4% in the third quarter. This was export driven; meanwhile, consumption and investment growth was gradually decreasing. Companies ceased cutting their inventories; however, investments shrank due to both domestic and global uncertainties. Export growth accelerated to 33% in October, partly because of exports of crops. Negative growth in the euro area had a somewhat limited effect on Lithuanian exports as they have been increasing rapidly to the faster-growing Baltic and CIS countries. Average annual inflation decreased to 3.1% in November; however, there will be some additional inflationary pressures next year.
Economic growth accelerated to 4.4%
Annual GDP growth accelerated to 4.4% in the third quarter. Economic growth was driven by increasing exports; in terms of volumes, this was 10.6% higher than a year ago. Household consumption was also a significant contributor to growth; however, its growth continued its gradual decrease, from 6.2% in the first quarter to 2.6% in the third quarter this year.
Contributions to GDP growth
15% 5.7% 10% 5.0% 5% 0% -5% -10% -15% 2010 2011 Household consumption Inv estment (excl.inv ent.) Net export Source: Statistics Lithuania, Swedbank 2012 Gov ernment consumption Inv entories GDP growth -1.0% 1.1% 0.9% 5.5% 5.6% 6.6% 3.9% 2.1% 4.4%

by 3.9% in the third quarter this year. Investment in fixed tangible assets (a component of gross fixed capital formation) was growing faster by 6.8% in the third quarter, compared with 1.3% in the second quarter. Nevertheless, investment in fixed tangible assets amounted to only 11.9% of GDP during the first three quarters this year - almost two times smaller than in the pre-crisis period. Some companies also decided to invest in repairing their existing machinery rather than investing in new equipment. Investment in the repair of machinery and transport equipment increased by 2.6 times in the third quarter. Such decisions might save costs in the short run; however, there is a growing need to invest in efficiency and capacity. Therefore, we think that investments should rebound as interest rates are low and companies have internal resources.

Expectations are weaker

So far, however, uncertainties, which are now somewhat more related to future economic policies than the external environment, have deterred companies from embarking on more risky investment projects. Industrial confidence has decreased to the lowest level since end-2009. As there have not been any major negative changes in the external environment and export performance is good, these expectations are most likely being affected by uncertainty regarding new government economic policy and, to some extent, by weaker household demand.

Companies stopped reducing their inventories, which had been a significant drag on growth for the last few quarters. However, heightened cautiousness and uncertainty was evident from decreasing investments. Gross fixed capital formation shrank by 0.9% in the second quarter and

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 Maiulis, +370 5 2582237. Vaiva ekut, +370 5 258 2156.

The Lithuanian Economy Monthly newsletter from Swedbanks Economic Research Department, continued No. 8 18 December 2012

Consumer confidence picked up from -19 in October to -15 in November; however, retail trade confidence fell to -13, the lowest level since the beginning of this year.

Exports are booming but are likely to moderate soon

Lithuanian exporters are finding markets for their products despite the contraction in the euro area. Exports of goods increased by 12.9% during the first ten months this year compared with the same period a year ago.
Exports of goods and services, LTL m
9000 8000 7000 6000 5000 4000 3000 2000 1000 0 2008 2009 Exports Exports Exports 2010 2011 2012 of goods (ls) of goods produced in Lithuania (ls) of serv ices (rs) 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0

Happy farmers and depressed builders

manufacturers,

In the third quarter, the agricultural sector's performance stood out, as its value added increased by 14% in a year. Over the same period, the construction sector contracted on an annual basis for the first time since the second quarter of 2010. Value added in the construction sector decreased by 11.5%, slowing GDP growth by about 0.8 percentage point, or by the same amount as the agricultural sector boosted growth in the third quarter. The manufacturing sector rebounded significantly, and its value added was growing at the fastest pace since the third quarter of 2011. Manufacturing growth was significantly slower in the second quarter due to maintenance work on the oil refinery in Lithuania. However, production of manufacturing, except for refined petroleum products, grew at a slightly slower pace (8%) than in the second quarter. However, its growth accelerated significantly to 22.3% in October. Retail trade growth has been growing more slowly than in 2011. Some of the decrease might be attributed to the base effect. On the other hand, households have continued lowering their debt while deposits have been increasing. Moreover, real wages have been falling for almost four years now. This fall has significantly limited the growth of purchasing power despite the quite rapid decrease in unemployment this year.
Manufacturing and retail trade, yoy
25% 20% 15% 10% 5% 0% -5% -10% -15% 2010 2011 2012 Manuf acturing (ref ined petroleum products excluded) Retail trade (excl. motor v ehicles), y oy Source: Statistics Lithuania

Sources: Statistics Lithuania, Bank of Lithuania

Exports growth accelerated in October, when annual growth reached 33% and the exports of Lithuanian-origin goods increased by 28.6%. In October, the growth of mineral products boosted the growth of total exports by 7.1 percentage points, and the growth of Lithuanian-origin exports by 9.1%. Exports of grains increased fourfold, but the growth of food products, fertilizers, and furniture accelerated as well.
Contribution of main trading partners to annual goods' export growth, pp
40% 30% 20% 10% 0% -10% -20% -30% 2008 RU EE Other EU Total -26.6% 2009 2010 2011 2012Q1 2012Q2 2012Q3 CIS except RU LV PL DE Nordics Other Sources: Statistics Lithuania, Swedbank. 16.3% 11.4% 3.8% 28.5% 32.7% 28.8%

Lithuanias export growth was supported by the stronger growth of its trading partners in the CIS countries, particularly Russia, and of the other two Baltic countries.

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The Lithuanian Economy Monthly newsletter from Swedbanks Economic Research Department, continued No. 8 18 December 2012

Lithuanian manufacturers exported a little less this year to their main export markets in the euro area Germany and France. Exports to Germany, which is the main market for Lithuanian-origin goods, contracted by 2.7% during the first ten months this year compared with the same period a year ago. However, this is mostly due to an 85.9% decrease in exports of mineral products, which lowered the total export growth to Germany by 9.5 percentage points. Meanwhile, export growth to Estonia was affected in an opposite way as exports of mineral products increased by 37.5% over the same period. This growth contributed 21.4 percentage points to the annual growth of 28.8%. As the one-off effects fade, we expect export growth to moderate next year. Future growth will depend not only on the health of the euro area, but also on investments and economic policy.

Next year, inflation will be lifted by rising electricity tariffs, whose effect on inflation might be about 0.5 percentage point. The effect of higher excise duties on diesel and tobacco could be somewhat mitigated by a decrease in VAT tariffs on press and some transport services. Some additional cost pressure will probably be generated by an increase in the minimum monthly wage. It is planned that this will be lifted by LTL 150 (EUR 43.4) to LTL 1,000 (EUR 289.6), or 17.6 percent. Cost pressures would arise not only from higher wages of workers earning the minimum wage, but also from wage increases in wages of those who used to earn slightly more than the minimum wage. This significant increase in the minimum monthly wage will also likely raise wage expectations of all wage groups. Lithuania's economy, as well the other Baltic countries', has been outperforming those in the rest of Europe. Higher competitiveness has been achieved mainly due to lower unit labour costs. Now that this low-hanging fruit has been picked, it is time to pass the baton to productive investments. However, recession in the euro area, remaining risks in other regions of the world, and high uncertainty regarding domestic economic policy might further drag down investments and threaten Lithuanias competitiveness and limit growth. An increase in the minimum monthly wage, although more painful for some sectors and regions, should not threaten the economys competitiveness on the aggregate level; however, a heavier tax burden (implied in a new government programme) would have a negative impact on the investment climate. The new Government should take heed that a clear, consistent, and pro-business economic policy could encourage investments, create jobs, and boost wages. We think this is the shortest path towards the welfare economy, which is the main target and priority of the new government. Vaiva ekut

Inflationary pressures are generated by domestic factors

Deflation of 0.2% has been recorded for two months now. This is mostly due to the lower prices of fuels and heating. Average annual inflation decreased to 3.1% in November.
Consumer prices
6% 1.50% 1.25% 4% 1.00% 0.75% 2% 0.50% 0.25% 0% 0.00% -0.25% -2% 2010 2011 Monthly growth (rs) Av erage annual (ls) 2012 Annual growth (ls) Source: Statistics Lithuania -0.50%

Swedbank Economic Research Department

SE-105 34 Stockholm Phone +46-8-5859 1028 ek.sekr@swedbank.com www.swedbank.com Legally responsible publisher Cecilia Hermansson, +46-8-5859 7720. Nerijus Maiulis, +370 5 2582237. Vaiva ekut, +370 5 258 2156.

Swedbanks monthly newsletter The Lithuanian Economy is published as a service to our customers. We believe that we have used reliable sources and methods in the preparation of the analyses reported in this publication. However, we cannot guarantee the accuracy or completeness of the report and cannot be held responsible for any error or omission in the 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 losses or damages, direct or indirect, owing to any errors or omissions in Swedbanks monthly newsletter The Lithuanian Economy.

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