Lithuania cools down, though troubles remain

  • 2008-02-06
  • Staff and wire reports
VILNIUS - Lithuania's economy expanded 8.7 percent last year 's an impressive rate though comparatively lackluster in Baltic terms 's suggesting that the economy has entered a period of manageable growth.
Growth over the last quarter was 7.9 percent compared to the same three months in 2006, lower than many analysts' expectations. In the third quarter, annual GDP growth had reached a whopping 10.8 percent, triggering alarm bells that the economy might be overheating.
Data shows that domestic demand subsided somewhat in the last three months of the year despite the holiday season, with analysts pointing to the country's rising inflation as the culprit for raining on the spending parade.

Lithuania's biggest worry, they say, remains its labor deficit.
"Continuing tensions in the labor market imply that further growth of employment is coming to a halt 's thus wage increases are outpacing productivity growth and are thereby resulting in additional constraints on production," said Danske Bank in a brief analysis.
Tomas Andrejauskas, head of Financial Markets Service at Hansabankas, agreed. "The wage and price spiral is causing great concern since higher labor costs boost producer prices, which in turn contribute to the growth of consumer prices," he said.

Inflation has reared its ugly head in Lithuania, where consumer prices rose 8.1 percent last year, compared with 3.8 percent in 2006. Analysts expect inflation to reach double-digit territory in the first quarter.
"We expect the rise in prices to be the steepest in January and March. This will mostly result from administrative measures, including increases in excise duties levied on fuel, alcohol and cigarettes, as well as higher gas prices," said Andrejauskas.
"According to our projections, inflation will reach 9-10 percent in the first quarter," he said.
As in Latvia and Estonia, higher energy and food prices are undermining the government's fiscal restraint and forcing prices upwards. "The rise in the prices of hot water, centralized heating and transport services is inevitable," he said.

The president of the Bank of Lithuania, Reinoldijus Sarkinas, sees the situation through the same eyes.
"From May or June inflation can really begin to slow. I do not expect it to come down earlier," Sarkinas said Feb. 4 .
The Bank of Lithuania has forecast that the country's average annual inflation will reach 7.9 percent this year and then decelerate to 4.9 percent next year.
For years Lithuania was an overachiever in terms of inflation, but, as fate would have it, consumer prices began to rise just as the country was about to qualify for the eurozone. Now eurozone membership seems a dream.

Lithuania's average annual inflation rate as measured by the EU Harmonized Index of Consumer Prices was 5.8 percent in December, while the Maastricht limit for euro adoption was 3.4 percent. 
Muntianas said Jan. 31 that Lithuania would likely meet the Maastricht criteria in 2010.