Economic outlook improved, but not as sunny as desired

KLAIPEDA - With the New Year settling in, forecasts for its economic outlook are pouring in. Though most experts generally predict a brighter year, they all caution about possible impediments for crisis-affected Lithuania.
Lina Vrubliauskiene, chief analyst of Swedbank’s Macro Economy Analysis Department, asserts that the Lithuanian economy has already bottomed out and will grow approximately 3 percent in 2011. “Export recovery will be accompanied by domestic consumption recovery and increasing investments, particularly in the private sector. Investment recovery will result in growing company profits, increasing demand and a little bit improving of lending conditions. Nevertheless, though the crisis has been over, there lie some problems ahead,” Vrubliauskiene warned.

For the year 2011, she foresees record highs in Lithuanian exports, approximately 12 percent growth which, however, is a slower gain compared to last year. “Trends in exports will remain positive, as all our major export markets - Poland, Latvia, Russia and the Commonwealth of Independent States (CIS) - will grow faster this year than in 2010. Besides, the upcoming European Basketball Championship will prompt a positive impulse to service exports as well,” the Swedbank chief analyst maintained.

However, according to her, the labor market will recover slowly, both in creating new jobs and in salary growth. “In the new year, we predict job creation for 40,000 people, mostly in the private sector, which will decrease the current unemployment rate by 2 percent, to 15.5 percent. However, a slow salary increase, considering the speed of inflation and, consequently, price rises, will not be tangible,” Vrubliauskiene emphasized to The Baltic Times. She sets the inflation rate at 2 percent in 2011. As for household income this year, she sees it similar to the previous year’s level. “However, consumption recovery will be further induced by a slower savings rate due to the reduced savings interest rates. Lithuanian households have saved nearly 2 billion litas (579.7 million euros) over the two year crisis. Since unemployment risk is lessening and consumer trust is growing, household consumption will grow approximately 1 percent, particularly for non-primary necessity articles,” Vrubliauskiene pointed out.

In the short- and medium-term, she foresees the biggest domestic risk being related to the condition of the state’s finances and slowly proceeding structural reforms. “Though this year the budget deficit can be decreased up to 6 percent of GDP, it will surpass the 3 percent GDP level set by the Maastricht criteria and will be higher than the needed balanced budget level,”  Vrubliauskiene said.

Bronius Markauskas, chairman of Lithuania’s Chamber of Agriculture, is convinced that Lithuania ought to pursue what it has done best for centuries – grow agricultural products, produce food products and export them. “In 20 years, EU and world experts predict that food products, due to several important reasons, such as climate change, world population increase, economic growth and higher food product demand in Asia and Africa, will become strategic commodities. Will Lithuania take advantage of the developments and increase its agriculture product output? The positive response lies upon several conditions – whether Lithuania will have sufficiently high and stable procurement prices of agriculture production, proper general EU agriculture policies after the financial period is over in 2013, and the bureaucratic load decreasing for farmers,” Markauskas maintained to The Baltic Times.

He admits that agriculture production prices are very hard to predict. “In recent years, food provisions were getting more expensive in world markets. I reckon this year will be more stable in many senses. However, in the long term, food provision demand and, therefore, their prices should be increasing. As far as post-2013 European agriculture is concerned, we still have many unanswered questions. The European Commission has not made up its mind as to agricultural financing after 2013. Likely, we will find out about its decisions in the midst of next year. They will have a long-lasting effect not only for Lithuanian farmers, but for all EU farmers as well,” Markauskas asserted.

Vytautas Zukauskas, expert at the Lithuanian Free Market Institute (LFMI), says that, despite brighter general assessments for Lithuania’s economy, “its very bright scenario for 2011 is unlikely.” According to LFMI, in 2011, GDP growth will be about 3 percent; exports will rise approximately 11 percent, while the average salary will go up 3 percent. LFMI’s expert asserts the high unemployment rate will be one of the biggest problems for Lithuania this year. “It will go down a bit, but it will remain high overall – about 16 percent. An unemployment decrease should be related to laying a general foundation for economic growth. It is very important not to adopt what at first sight seems attractive, but, at the end of the day could be situation-worsening decisions; this could be, for example, not to increase the minimum wage,” Zukauskas maintained to The Baltic Times.

He emphasizes that the shadow economy will remain a burning problem in 2011. “Its share in the gross domestic product will reach approximately 27 percent this year. At least 36 percent of all households will do a part of their work activity in the shadows. Thus, the shadow economy scenery will not be much different from what we saw in 2010. We have to admit that the shadow economy, for a good many people, remains as an alternative to poverty and unemployment. Due to its vast spread during the crisis years, Lithuania has avoided major social unrest. It is the state’s concern to pull its inhabitants out from the shadows,” Zukauskas contended.

He claims that export growth will be one of the very few buoyant indicators in the Lithuanian economy in 2011. However, he cautions, it will affect positively only some enterprises. “It makes sense to take advantage of export possibilities; however, it cannot be a foundation for Lithuania’s economic recovery and growth,” the expert warned.

Zukauskas maintains that the state sector’s deficit and debt will be a burdensome issue in 2011. “The downturn has exposed a lack of flexibility in the public sector. It is estimated that in 2011, the state’s debt will make up 40 percent of GDP, while in 2008 it comprised only 16 percent. In comparison with other EU states, Lithuania’s debt is not very high. However, we should have in mind that, even during the double-digit GDP growth years during the economic boom, Lithuania was not capable of decreasing its debt. Since 1998 it has been constantly growing in Lithuania. Thus, it purports that Lithuanian officials are not good at managing it. Likely, with the recovery spreading, politicians may not be willing to handle it in 2011 either,” Zukauskas asserted.

Asked about euro introduction prospects, he answered, “The euro future will depend on how quick most economic hardship-stricken countries will be able to recover and see their economies growing.”
Gitanas Nauseda, advisor to SEB Bank’s president, and a notable financial analyst in the country, predicts that 2011 will be a bit better than the last year. However, he cautions, not to be excessive with expectations. “For 2010, we expected faster GDP growth, to be exact, about 4 percent, and domestic market recovery; however, expectations have failed. Domestic consumption was impeded not only by fundamental reasons, such as a high unemployment rate and salary decrease, but also by the pessimistic expectations that reflected the population’s tensions and uncertainty about the future. However, in 2011, the situation should improve, but slowly,” Nauseda shared his insights with The Baltic Times.

Asked about loan market prospects, he replied, “Crediting directly depends on client solvency.” The analyst contends that if the circle of clients, being able and willing to use financial services, does not expand considerably this year, it will be difficult for banks to enliven the market. “In the last months of 2010, there were observed tentative loan portfolio growth trends, which have become a good introduction to 2011. I think that credit resources should not get very expensive this year, as the European Central Bank will try not to stifle the frail economic recovery and will go ahead with a ‘cheap money’ policy. However, in the second half of 2011, EURIBOR interest rates will likely go up, counting in a possible base interest rate increase in 2012,” Nauseda predicted.

As for euro introduction in Lithuania, the analyst anticipates “it can be introduced in 2014 at best.” He warns that “In order to achieve this, it is necessary to decrease the fiscal deficit to 3 percent of GDP in 2012 and keep up a modest inflation, not allowing it to exceed that which is set by the Maastricht criteria. Considering that elections to the Seimas will take place in 2012, it will not be simple to follow strict fiscal discipline, as pressure for the ruling coalition to implement its given social promises, such as pension restoration to the pre-crisis level, will only increase.” Nauseda expects that exports in 2011 will keep growing, particularly to eastern markets and neighboring countries Latvia and Poland. However, he warns, it is important not to give up the positions that have been seized in Western markets in 2010.

Julita Varanauskiene, a SEB Bank analyst, says that households’ financial life started to return to normal in 2010. “Starting with the second half of 2010, there appeared more positive news for households – very slowly, but assuredly salaries began to grow, new jobs numbers started to increase, fractionally. Public polls also speak about lower pessimism,” Varanauskiene related to The Baltic Times. She says that SEB Bank’s analysts see this year in a considerably brighter light than last year. “According to the analysts, in 2011, unemployment will fall from 17.5 percent to 16 percent, while the average salary should increase by 3.5 percent. Therefore, household income will rise slowly and, likely, it will be easier to find a job this year. Increasing prices will diminish the positive effect of a larger income, though. Our analysts envisage price increases in the commodity and service basket by 2 percent in 2011. Due to a higher excise tax for fuel, energy resources may get more expensive in 2011. It also can be a result of increasing oil and gas prices in international markets. Therefore, prices of some commodities, including food products, may go up,” Varanauskiene guesses.

Viewing the data of 2010, she emphasizes that in some market sectors, for example, in the pharmaceutical industry, salaries have already increased by 14 percent, while in the computer, electronic and optics industries average pay has gone up by 12 percent. “Certainly, the crisis has been over in some market sectors. The trend will likely prevail in the new year,” Varanauskiene expected.

Algimantas Kondrusevicius, president of Lithuania’s National Road Carriers’ Association, asserts that economic trends in Western and Eastern markets being served by Lithuanian haulers are favorable. “However, our carriers frequently encounter with neighboring countries administrative hurdles. With the newly adopted order, load declaration procedures should be shortened to 5-10 minutes, facilitating our carriers’ work. However, in the domestic haulage market, I do not see much optimism. Due to the increased excise tax for diesel, load haulage and passenger transport will become more expensive for all. Therefore, other merchandise and services will jump in price as well in 2011,” Kondrusevicius predicts.
Public opinion polls show returning optimism to Lithuanian households, which can probably be considered as the most anticipated sign for a better year and life.