Domestic demand, i.e. household and government consumption, as well as investments, most likely remained the main driver of economic growth. Although the consumer confidence has declined due to the increased political and economic uncertainty in the region, this has not yet reduced their propensity to consume. In the second quarter of this year retail trade was 6.1% higher, compared to the same period last year.
Despite the increase in uncertainty due to the Russian-Ukrainian crisis, it has so far had no direct negative impact on the Lithuanian companies; thus, it is unlikely that many of them have modified their investment plans. Nevertheless, some companies that trade predominantly with Russia as well as some transport and logistics companies that carry cargos to this country could have altered their investment decisions as a reaction to the worsened economic situation in Russia.
Higher investments into housing contributed to the total investment growth in the country, but the former were most likely growing at a slower pace than earlier this year. Due to a decline in the consumer confidence, the growth rate of the number of transactions for apartments in Vilnius decelerated from double digits to just 6%. Thus, it is most likely that in the second quarter of this year the investments grew at a somewhat slower although still a rather rapid pace.
Exports remained the weakest part of the economy, but it had a smaller negative effect on the economy than in the previous quarter. In April – May the exports of goods in nominal terms were 6.7% lower, compared to the same period last year. A decline in the exports of vehicles, oil products, vegetables and crops had the largest negative contribution to shrinking exports.. The exports to Russia declined as well. This decline was most likely affected not only by the deteriorating purchasing power of the Russians and a drop in demand for investment goods, but also by lower income of Lithuanian exporters as a result of cheaper rouble.
Despite a temporary improvement in the export growth rates of oil products in May, the manufacturing data of June does not give any reason for optimism – the harsh times for the Lithuanian oil refinery are far from over. Nevertheless, the majority of other manufacturing branches remained competitive – they continued to augment their production and exports.
Outlook: the fears are not good for growth
We expect GDP to expand by 3.3% this year and increasing domestic demand will remain the main driver of growth. However, a decline in business and consumer confidence might have a negative effect on consumption growth and might modify business investment plans in the second half of the year.
Lithuania will join the euro area in 2015 and we expect GDP growth to accelerate to 4%, mainly due to further improving expectations and strengthening domestic demand.