Lithuanian Economic Outlook

Photo by Kęstutis Petronis Photo by Lithuanian Economic Outlook 2009 Lithuanian Economic Outlook 2009 Foreword Throughout the year the shifting winds of the economy put the Baltic countries, and Lithuania among them, into sharper focus than ever before. Economic recession has clearly become a key topic in business and in everyday life. Therefore, I am pleased to present the latest publication by DnB NORD Bankas’ Economic research team, Lithuanian Economic Out- look, that embraces a thorough economic sectoral analysis and in-depth examination of the Lithuanian economy. The publication is an important part of DnB NORD Bankas’ strategic initiative to become a financial guide to our custom- ers. We firmly believe that namely during periods of economic downturn both individuals and corporate clients need financial advice and are looking for open and professional dialogue more than ever. Considering the fact that Lithuanian businesses have proved robust and resilient to all kinds of rigour, I expect the analysis will be a helpful instrument to leaders and managers to manoeuvre through the economic turmoil and emerge with stronger and more efficient business. Werner Schilli President DnB NORD Bankas Lithuanian Economic Outlook was prepared by: Assoc. Prof., Dr. Vadimas Titarenko Chief Economist of the DnB NORD Group In memoriam Prof. Rimantas Rudzkis Chief Analyst Tel. +370 5 2393402, +370 686 59638 e-mail: [email protected] Jekaterina Rojaka Senior Analyst Tel. +370 5 2393590, +370 685 47578 e-mail: [email protected] Indrė Genytė Senior Analyst Tel. +370 5 2393678, faks. +370 5 2139056 e-mail: [email protected] Content 1. Macroeconomic overview .......................................................................... 7 2. Business and consumer confidence indicators ........................................ 13 3. Gross domestic product ............................................................................ 19 4. Prices ................................................................................................................... 23 5. Labour market and income ...................................................................... 29 6. Foreign trade and balance of payments .................................................. 35 7. Investments .............................................................................................. 41 8. Financial indicators of enterprises ........................................................... 47 9. Government finance ................................................................................. 51 10. Financial market ....................................................................................... 57 11. Real estate market ................................................................................... 65 12. Agriculture ................................................................................................. 71 13. Mining and quarrying ............................................................................... 75 14. Manufacturing ........................................................................................... 79 Food products and beverages .......................................................................... 83 Textiles and wearing apparel ............................................................................ 88 Wood, wood and paper products and furniture .................................................... 91 Refined petroleum products ............................................................................. 95 Chemicals and chemical products ..................................................................... 96 Rubber and plastic products ............................................................................. 99 Other non-metallic mineral products ................................................................ 101 Basic metals and metal products .................................................................... 104 Machinery and equipment ............................................................................. 107 Electrical and optical equipment ..................................................................... 110 Transport equipment .................................................................................... 113 15. Electricity, gas and water supply ........................................................... 117 16. Construction ............................................................................................ 123 17. Domestic trade ........................................................................................ 129 18. Transport ................................................................................................. 135 19. Information and communication technologies ..................................... 143 20. Hotels and restaurants ........................................................................... 149 21. Annex ...................................................................................................... 155 Comments ............................................................................................... 178 1. Macroeconomic overview 1. Macroeconomic overview Last year, the nature of economic develop- these threats. The latest statistics on produc- ment in Lithuania changed dramatically. A tion, foreign trade, tax collection and labour strong growth of the last couple of years was market “dispelled the fog”. It is enough to replaced by a downturn in autumn. It was not mention the staggering Lithuanian unemploy- hard to foresee these changes as indicated ment rate published by Eurostat for March in the previous publications of the Lithuanian 2009: the latter estimate is above 15%, while Economic Outlook. The investment climate it lingered around 4% just a year ago. So it is in the country has been recently deteriorat- no accident that the Ministry of Finance dras- ing: red tape barriers of business regulation, tically cut its previous estimate of GDP growth widespread corruption, inflexible labour mar- in 2009 to –10.5, but it is believed that the ket, unfavourable business environment for new projection is too optimistic as well. small and mid-sized companies, unreformed vocational training and higher education sys- Before discussing the immediate prospects of tem were negatively affecting the competi- the national economy, we will briefly review tiveness of Lithuanian companies. A huge the main macroeconomic indicators of 2008, foreign trade deficit clearly showed that the even though last year’s statistics hardly re- country was consuming much more than it flect the current situation since the deterio- should be according to the income level. Rat- ration of the economic environment acceler- ing agencies and analysts were downgrad- ated in the last few months only. In recent ing the outlook for Lithuania, expectations years, economic development in Lithuania of business and households were worsen- has been similar to that in Estonia and Lat- ing due to overheating of the economy and via, although compared to the neighbours the banks tightened their lending policy, which relevant trends in our country reversed with pushed the real estate market into a stand- some delay. Indicators of the Baltic States still and weakened the domestic demand. Al- presented in Table 1.1 show that economic though the portfolio of banking loans granted growth in Lithuania slowed down consider- to business and households still kept growing ably during last year but still remained posi- last year, net credit flows continued to shrink tive, while Estonian and Latvian economies and at the end of 2008 fell to a level of 4–5 were contracting. In the fourth quarter of years ago. Some companies failed to adapt last year, the annual change of the real GDP to the nature of rapidly changing environ- in Lithuania became negative as well. Stall- ment and accusations were being thrown at ing domestic consumption and falling invest- the banks that they were ruining business. ments last year slowed down the growth of However, the problem lied in higher business imports and significantly reduced the current risks and the shortage of available financial account deficit (CAD) in all the Baltic States, resources entailed by the ongoing crisis on but the CAD to GDP ratio in these countries global financial markets rather than a lack of remained very high. Lithuania’s indicator fell goodwill. In the second half of the year, the by 3 percentage points to 11.6%, while the first signs of a downturn were obvious in the latter of Latvia was even higher although it majority of economic activities. went down by nearly a half in a year. As the economic development fell short of expecta- Nevertheless, the scope of negative changes tions, budget revenue of these countries was was much wider than expected. The global well below the target. Therefore, preliminary economy stasis made our main export mar- estimates indicated that the fiscal deficits of kets contract so the national economy re- Lithuania and Latvia even slightly exceeded ceived a double blow and faced a real threat the Maastricht criterion (3.2% and 4% of of a deep recession. As a result of a “short- GDP respectively), while Estonia’s indicator sighted” fiscal policy of the previous Cabinet, was marginally better. All this compounds the the country teetered on the brink of default. efforts of these countries to join the eurozone Although the cabinet of ministers led by as soon as possible. Kubilius

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