Domestic demand pushes wider recovery

VILNIUS - The trend for macroeconomic indicators shows a strengthening of the economic recovery in Lithuania, reports news agency ELTA. In addition to rising activity with the country’s main foreign trade partners, the recovery in domestic demand is starting to exert a favorable influence on the economy. The real GDP is growing largely due to the increase of the value-added created in manufacturing; however, activities oriented towards domestic demand, such as construction, trade, financial intermediation, are also starting to improve. Domestic demand, especially private consumption, is recovering slightly stronger than expected; therefore, more favorable economic developments are anticipated: real GDP is expected to grow by 5.6 percent in 2011 and by 4.8 percent in 2012.

Real private consumption, which declined by more than a fifth during the downturn, is starting to recover. Larger household consumption expenditures contributed to the GDP growth already at the end of last year, whereas available information shows that it continues to rise. Private consumption growth has been partly determined by more favorable expectations of households, whereas in the nearest future it will also expand due to a better situation in the labor market. As private consumption is growing more than expected, the outlook for this indicator is more favorable over the entire forecast horizon: it will increase by 5.3 percent and 4.8 percent in 2011 and 2012, respectively.

With the rise of economic activity, the situation in the labor market is improving gradually. Although the unemployment rate was high in 2010, it started to decline in the second half of the year. The number of newly unemployed has been decreasing and the number of vacancies has been growing for some time already. Employment started to increase in some activities, such as information and communication, transport, accommodation and food service, financial and insurance activities.
It is expected that, with the acceleration of the economic recovery, the situation in the labor market will continue to improve; however, it should be noted that labor market efficiency will also have its impact on further labor market developments. The situation will get better if those in search of a job are capable of meeting market demands and are determined to change their qualifications and ready to take on a job in those locations of the country where jobs are being created. If the labor market is less efficient, the situation may be worse than currently projected.

In the context of growing domestic demand, the real import of goods and services is starting to increase slightly faster than exports. Still, export performance is very good. Favorably affected by foreign demand, at the end of the previous year exports of goods and services exceeded the highest level observed in 2008. Noticeable growth has been observed both in goods produced and services provided by domestic economic entities and in the overall exports of Lithuania. The economic development prospects of the key Lithuanian foreign trade partners remain favorable; therefore, exports are expected to increase further, albeit at a lower rate.

In the beginning of 2011, annual inflation in Lithuania declined due to the base effect; however, it remained higher than in the EU and the eurozone. Annual inflation in Lithuania is mostly determined by the rise in food, fuel and administered prices, the development of which is closely related with global price trends. The prices related to external factors are rising faster than anticipated. Therefore, higher average annual inflation is projected in Lithuania: it should be 3.8 percent in 2011 and 3.9 percent in 2012. As domestic demand is just starting to recover, its pressure on prices has not been observed yet, however, it may emerge when economic recovery matures.