Swedbank: Household consumption becoming key driver of Lithuanian growth

  • 2015-04-04
  • By Karolis Broga

With declining export and weakening economic growth, household consumption is becoming an ever increasing factor of economic growth. Having reached its peak ever since late 2007, consumer confidence provides hope that the negative influence of declining export to the Commonwealth of Independent States (CIS) may be at least partially counterbalanced by growing consumption. On the other hand, it seems that, in general, Lithuanians will save more this year, says Swedbank’s Chief Economist, Vaiva Seckute.

In January 2015, compared with January 2014, export of goods decreased by 8.8 percent. However, it was mostly affected by the export of mineral fuels - excluding this, export of Lithuanian origin goods decreased by just 0.7 percent. Nonetheless, this is a substantially poorer result than last year, when the export of Lithuanian origin goods grew by 4.4 percent. The growth of export of services, which reached as much as 9.1 percent, was slightly unexpected this January. But its further increase should not be expected because export of transportation and tourism services is closely reliant on Eastern markets which are facing difficulties at the moment.

The decline in exports was mostly a result of a 30 percent plunge in milk product exports. However, the export of wood and plastic goods also fell significantly. Export of goods to Russia contracted by as much as 38 percent. Export to other CIS countries, such as Belarus and Ukraine, also decreased considerably.

The decrease of dairy product export was mostly caused by the embargo imposed by Russia. Moreover, dairy product export to Belarus somewhat decreased in January 2015, although prior to this it had grown by dozens of times. It is likely that dairy products might have also entered the Russian market through Belarus. In September-January, dairy exports to Kazakhstan increased by 2.5 times. Dairy companies were one of the most active among those looking for new markets. In the fourth quarter of 2014, exports of dairy products to the USA increased tens of times, in December-January export to Azerbaijan increased twice compared to a year ago, between November and January exports to Uzbekistan jumped by a staggering 22.6 times. In addition, in January 2015 dairy product exports to Libya commenced.

Meat exporters also managed to find new markets. Meat exports to Hong Kong increased by 5.6 times  between August and December 2014, but dropped slightly in January 2015. Meat exporters increased exports to Poland by 2.7 times between September and January, while exports to the Netherlands surged by 39.7 percent in 2014 and by 47.4 percent in January 2015.

Nevertheless, Chief Economist of Swedbank, Vaiva Seckute, says that all these staggering export growth figures were achieved due to low comparative basis - penetration of these markets was basically very insignificant before this. Furthermore, despite the growth in new markets, exports of Lithuanian goods decreased by 11.1 percent compared to last year. And products from Lithuanian food producers account for only 7.3 percent of total exports. Whereas it will be difficult to find an alternative market for many other Lithuanian origin goods, especially those meant for re-export.

Therefore, household consumption is likely to be the sole factor in Lithuania’s economic growth. In January 2015 its growth slowed down somewhat as retail trade growth increased by a mere 1 percent. Consumption growth slowed down at least partially as a result of the introduction of the euro. Some consumers rushed to purchase items before the adoption of the euro in fear of price growth, while others decided to spend cash litas - in December 2014 retail trade grew substantially by 8.2 percent. In February 2015, when consumers had already got used to the single currency of the EU, retail trade grew by 4.3 percent.

Consumer confidence unexpectedly increased in March and reached the highest level since late 2007. Consumers evaluate much more optimistically their household’s financial situation, Lithuania’s economic prospects and prospects in the labour market. Consumers also believe that the time is beneficial for saving - the indicator has reached its historic peak. Meanwhile projections of major purchases are lower than the year ago. Thus it seems that Lithuanians are likely to save rather than spend at least some of the additional funds they will receive due to growing wages and low inflation.