Looming double-dip recession puts in question Lithuania’s preparedness

  • 2011-09-21
  • By Linas Jegelevicius

Gitanas Nauseda says consumers still aren’t spending.

KLAIPEDA - Will a double-dip recession rattle the world, and will the tremor reach Lithuania that, apart from Latvia, has been crisis-hit the hardest? If it happens, will the majority of still crisis-stricken Lithuanians pull through? Will the looming relapse of recession trigger social unrest in the country?
These are the questions that many prominent Lithuanian politicians and economists ponder nowadays. In truth, no definite conclusion has been drawn to these questions.

However, most of the pundits agree that the likelihood of a double-dip should be estimated at 30 percent. “The adverse effects of a new wave of recession cannot be evaluated one-sidedly,” says Jekaterina Rojaka, DnB Nord Bank Group chief economist. She points to Lithuania’s foreign trade deficit, which equals 600 million litas (173.9 million euros) - an import-export trade balance based on 5.7 billion litas in exports and 6.3 billion litas in imports. According to the statistics, in 2011’s first half-year, exports went up 38.3 percent, and imports increased 37.6 percent, year-on-year.

Rojaka, contrary to some other experts, says that the increasing imports are more beneficial than detrimental to Lithuania.
“Recently, there has been a large volume of investment goods in the import structure. It is a good sign, as Lithuania lacks investment goods. According to investments into new machinery and equipment, Lithuania is at the EU bottom. In that sense, we are considerably behind even Latvia and Estonia. Without imports, it is impossible to improve the standing, even to the EU average,” the bank economist pointed out to daily Lietuvos zinios.

She maintains that, with the growing economy, especially in a small country like Lithuania, a certain trade deficit is “necessary” to sustain consistent economic growth.
Gitanas Nauseda, another prominent Lithuanian financial analyst and SEB bank president’s advisor also plays down the negative trade balance. “In no way has it endangered the stability of our currency. It is a classic development when, in the initial stage of economic recovery, import volumes exceed export volumes. It makes no sense to rush to dramatic conclusions whatsoever,” he says after calming down.

He, however, disagrees that import-oriented business entities are too optimistic, expecting the population to continue going on a shopping spree. “If we take a look at the import structure, we will not see final consumption goods prevail, but investment goods and raw materials, and, in 2011’s first year-half, car re-exports. What matters most is that, due to the coming heating season, domestic consumption will not to recover. Also, I have serious doubts whether the domestic final consumption of imported goods will make any larger inroads by the end of the year. Obviously, Lithuanians’ purchasing power will be limited by large heating bills,” Nauseda predicted.

He notices that, in some municipalities, the bills can be as much as 20-30 percent larger, year-on-year, making up a very significant part of a household’s income.
An analysis of world economic perspectives by SEB Bank financial analysts reveals quite a gloomy prediction for the economy, envisioning a 55 percent likelihood of an economic slowdown, but staying short of a double-dip recession. The analysts have given a 30 percent probability for a relapse of recession, and only a 15 percent chance for continuation of recovery.

“In fact, there are financial institutions in the West that have put the recession likelihood at 80 percent. It goes without saying if it strikes the United States and Europe again, Lithuania will feel its adverse effects through the trade volumes and the financial markets. In this case, the recession scenario will become very probable in Lithuania,” the SEB Bank financial analyst pointed out.

The economist, however, could not give a definite conclusion as to whether a double-dip recesssion will impact money-strapped Lithuanians more adversely than the 2008 crisis. “On the one hand, most households have suffered severely because of the mounting heating and gas bills during the crisis. On the other hand, the financial load has become less for many households, as many of them have been repaying loans; meanwhile, there have been quite a few new ones. In general, the loan load has decreased significantly recently, which allows the population to be braver while meeting possible new financial challenges,” Nauseda pointed out.

Nevertheless, he agrees that an economic decrease similar to the 15 percent shrinkage in 2008 would be “hardly bearable” for most. “If prices remained the same and salaries were slashed, most people would be literally made to gnaw at the bone. Conclusively, the fallout would be much more painful than in 2008,” the economist inferred.
He points out, however, that the state itself has now been prepared for a recession much better than 3 years ago. “The state finances are much better stabilized today than 3 years ago. Most ventures have adapted accordingly throughout the crisis, diminishing their expenditures while increasing their effectiveness. They, no doubt, are also better prepared for a double-dip recession. However, the population, especially pensioners and those depending on social allowances, have been hardly better prepared,” the financial analyst maintained.

Rojaka cautions that, though consumer expectations, compared to 2007, are significantly lower, the consumer trust index is on a constant rise. “So far it seems that Lithuania, in comparison with many EU countries, scores quite well, according to many economic indicators. The positive outlook prompts bigger and freer domestic consumption. On the other hand, the general trends are rather gloomy, therefore, it would be too risky to encourage consumption,” Rojaka said.

She also does not reject the idea of a possible double-dip recession, pointing to a recent European Commission prognosis on eurozone growth. It is based on possible actions of the European Central Bank, more specifically on plans to decrease nominal interest rates in order to spur consumption and economic recovery.
“If the worst economic development scenario happens, Lithuania, along with the entire Europe, will step into recession. What makes things even worse is that, in this case, Lithuania would have even less measures to withstand a double-dip recession,” the DnB Nord Bank chief economist pointed out.

She predicts that the likelihood of Greek bankruptcy is “high.” According to her, the worst scenarios in Greece will ill-effect Lithuania as well. “If, in the attempts to stave off a Greek bankruptcy, the euro currency printing machines start revving up, the Lithuanian economy will import a part of the Greek-induced inflation and, thereby, will meet some serious challenges ahead,” the analyst predicted.

She added that, possibly, due to inflation, Lithuanians would risk seeing their bank savings devalued. The amount of personal savings has reached record highs during the crisis. On the other hand, the analyst says, Lithuania would avoid a direct impact on its economy through stocks and banks in the case of bankruptcy. “Obviously, the German banks that have credited Greece billions of bailout euros would suffer most, and, thereby, the whole of German industry. In this case, no doubt, Lithuanian exports would shrink considerably, as Germany is one of Lithuania’s most important export markets,” Rojaka said.
Sigitas Besakirskas, Economics and Finance Department analyst at Lithuania’s Industrialist Confederation, maintains that “industrialists’’ moods are “grave.”

“For quite some time, we have been hearing that foreign partners shun signing long-term contracts, as short-term contracts prevail. Therefore, many Lithuanian ventures are putting their expansion plans on hold and show less optimism. Just one year ago, the rapidly growing exports were the main sign of Lithuanian economic recovery,” Besakirskas pointed out.
He predicts that stagnation due to instability in the U.S. and Greece will prevail for some time.
“Our experts are considering reviewing next year’s economic growth prognosis, possibly slashing it, at 4 percent currently. Upon the economic outlook, it is very unlikely to see Lithuanian companies investing and hiring,” the analyst cautioned.
He says that the upcoming months can be crucial in tackling double-dip recession fears in the U.S. and Europe.