DNB outlook: Lithuania will be the first among the Baltic countries to return to 2008 economy peak

The economic growth recorded for a few subsequent years as well as the exceptional export indicators will drive Lithuania to the pre-crisis level of 2008 next year, – DNB Bankas economist forecast in their latest "Baltic Economic Outlook" presented today.

According to the forecast Lithuania's real gross domestic product (GDP) will grow by 2.5 per cent in 2013, while the economic growth of Estonia and Latvia will account for the year-on-year rise of 1 per cent and 4 per cent respectively. Lithuania will be the first to reach the peak of the year 2008, followed by Estonia shortly, while Latvia will recover the ground by the end of 2015.

"In terms of the turnover, all of the key export oriented economic sectors (manufacturing, transportation and wholesale trade have already reached the level of 2008, while Lithuania's entire economy will be back to its historical peak in the middle of next year," – said DNB bank's senior analyst Indrė  Genytė-Pikčienė.

The domestic consumption-oriented sectors are just starting to gain momentum. This mainly results from the labour market situation which is rather complicated so far: the households’ income and the unemployment level are still below the pre-crisis level.

Favourable macroeconomic indicators bode well to Lithuania’s ambition to join the eurozone in 2015. Lithuania meets the Maastricht criteria with a good margin in terms of low interest rates on the long-term sovereign bonds and a reasonable level of the public debt. However, the introduction of the Euro might be challenged by the inflation as a result of the increased excise duties and by the general government deficit to GDP ratio, balancing on the critical 3 per cent level.

DNB analysts say Lithuania’s major economy locomotive appears to be loosing momentum this year, i.e. the export rates were slowing down noticeably in the second half of the year. This resulted from the stagnating country’s key export markets. The European Union (EU) economy has been showing the first signs of recovery, while the economic growth in Russia, Belarus, Nordic Countries has been slowing down. Lithuania’s export figures will also be negatively effected by Russia's protectionist actions against the country’s food industry and carriers as well as by last year's high comparative base due to the record high grain export in 2012.

"The EU economy should demonstrate a more sustainable recovery next year which will positively impact Lithuania's export figures," – the analyst said.

Lithuania's declining export will be partially ofset by the recovering domestic demand as indicated by the improving consumer confidence, stronger retail performance and the recovering credit market.

A moderate growth in the domestic demand will keep the consumer prices from running up: the forecast is that at the end of the year the inflation in Lithuania will account for 0.7 per cent and in 2014 it will go up to 2 per cent year-on-year. Next year the trends in consumer prices will largely depend on the prices for food raw materials and for energy in the international markets as well as on the intended changes in the taxation system.

"The excise duties on ethyl alcohol, hard drinks and tobacco products will be increased in spring next year. Besides, Lithuania has undertaken to introduce an excise duty on natural gas used as fuel for heating starting in May next year. In fact, the precise gas price to an end user will depend on the results of the on-going negotiations with "Gazprom": in case Lithuania succeeds to agree on a lower price for gas, the end price for gas to the Lithuanian consumers is not likely to increase," said I. Genytė-Pikčienė.

According to I. Genytė-Pikčienė, the salaries show a sustainable growth trend – DNB analysts expect that by the end of this year the average monthly wages will increase by 5 per cent, while in 2014 the growth should make 6 per cent. They also note that the salary rise is starting to outpace the productivity growth.

"The increasing labour costs, ageing society, and high migration are diminishing the Lithuanian business potential, therefore businesses should focus on increasing the productivity and renewing the production capacities. Our forecast is that in a few years' perspective, with the recovering export markets and economy, businesses will invest more in streamlining and development," – DNB analyst emphasised.

Key macroeconomic indicators for the Baltics

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The e-publication of the "Baltic Economic Outlook" as well as the presentation material are available at AB DNB Bankas' website.