DNB analysts: Lithuanian economic development sustainable, threats loom from the East

The Lithuanian economic growth is becoming more sustainable and better balanced as the lost export markets are counterbalanced by growing domestic demand. However, Russia's stagnating economy and the geopolitical tension between the East and the West will do a disservice to the country's economic growth, DNB analysts say.

According to DNB analysts' forecast, in 2014 Lithuania's gross domestic product (GDP) is expected to grow 3 per cent coming slightly behind Latvia (GDP growth forecast 3.5 per cent) but well ahead of Estonia (GDP growth forecast 1.2 per cent).

"This year we see much more of good news, especially for individuals: the salaries will keep growing, the price increase will be minimal making individual purchasing power noticeably better. This will undoubtedly have a positive effect on domestic-oriented businesses", says DNB Bankas’ chief analyst Indrė Genytė-Pikčienė presenting the latest outlook on Baltic economies.

The analyst underlined that the domestic demand is rapidly recovering after the downturn and the recovery is stimulated by rising expectations of private individuals and businesses as well as by growing income. This year the average salary is expected to grow faster than the GDP, while inflation will be decreasing due to the cheaper energy resources. Upon agreeing on a lower price for gas supply, the average annual inflation in Lithuania will stand at 0.7 per cent this year.

The greatest risks on the country's economic development are Russia’s stagnating economy, the stress in major oil refinery, struggling fertilizer production, and vulnerable cross-border transportation sector. After two exceptionally good years, the agricultural sector is likely to be less successful this year.

Challenges to exporters

According to the DNB analyst, Russia remains one of the largest export markets for Lithuania. It takes 7.1 per cent of overall exports of goods of Lithuanian origin, 25 per cent of service exports, and 43 per cent of re-exports.

"Russia will do a disservice to the rapid growth of economy. The conflict with Ukraine highlighted the sore structural economic problems in the country, which are threatening to push Russia into a technical recession this year. Also, the depreciating ruble makes it more complicated for Lithuanian goods and services to compete with the local products.  This might give an extra impulse to Lithuania's producers to search for alternative export markets, although less profitable at the beginning", commented I. Genytė-Pikčienė.

In January-March of 2014, exports of goods of Lithuanian origin decreased by 20 per cent year-on-year. Exports of oil products slumped by 48 per cent resulting from the poor performance of Orlen Lietuva. However, exports of goods of Lithuanian origin excluding mineral products decreased by only 2 per cent.

Focus on productivity

The average monthly salary is expected to go up by 4 per cent in Lithuania this year. Real salary rise for the second year running will stimulate domestic consumption, so the recovering domestic demand will become the main driver for the Lithuanian economy. However, this will also mean higher costs for businesses. To maintain competitiveness businesses will have to focus on the increase in productivity.

"Last year's results demonstrate the long-awaited breakthrough in this area, i.e. productive investments in manufacturing equipment and technologies increased at double-digit rates. To remain competitive on the cross-border level, the renewal of manufacturing factors must keep the same pace this year", says I. Genytė-Pikčienė.

The unemployment rate in Lithuania will continue moderate decline this year. As of the year-end, it should stand at 10.5 per cent.  Hiring will be impeded by acute structural unemployment problem with a high number of unemployed and lack of required specialists to employ at the same time.  This will encourage businesses to further invest in less labour-intensive production.

Euro expectations heating up real estate markets

In the first quarter of 2014, the number of real estate (RE) transactions topped 10 thousand, increasing by 43 per cent year-on-year. By the number of transactions the RE market reached the pre-crisis level of 2006-2007.

DNB analysts say that active RE market is stimulated not only by growing personal income and low interest rates, but also by the expectations about the Euro introduction. The commotion in the residential market mainly results from the expectations for increasing prices for housing following the Euro introduction and lack of alternatives for investments.

"The fact that more than half of RE transactions are made using own funds reflects a high level of individual savings and also the size ", - the analyst says.

Key economic indicators of Lithuania

For more information, please refer to:

Indrė Genytė-Pikčienė

Chief Analyst

e-mail: Indre.Genyte-Pikciene@dnb.lt

Mob. tel. 8 620 78373

Tel.: 85 2393 678