What will drive the Lithuanian economy this year?

In 2016 the Lithuanian economy grew by 2%, this year bank analysts forecast GDP growth from a more modest 2.8% to an excellent 3.2%, Tv3.lt reported.

Lithuanians spend almost everything they earn.

While Lithuania is an open country to export, this year the main metric to watch is wage growth and increased consumer consumption.

Danske Bank Chief Economist for the Baltic States Rokas Grajauskas states that wages should continue to rise rapidly this year which will place consumption into first place. Since wages decreased after the crisis, the title of economic engine went to export for a long time. The situation is now changing however.

“Last year wage growth reached roughly 7.5%, this year net wages should be even greater due to non-taxed income size rising from 200 to 310 euro. Looking at those earning average incomes and particularly at those earning lower incomes, this increase could be even more pronounced.

According to our estimates average net wages could rise by almost 9% and this will be the chief factor influencing consumption.

Nevertheless inflation will also be greater and this will devour at least a portion of the purchasing power obtained through growing wages. Another factor which remains a variable is the employment situation, how many jobs are created. There are various predictions, but according to our estimates we should continue to see growth in employment because currently there are over 100 thousand unemployed individuals and we can see that despite the lack of qualification or the unsuitable geographical location, at least a number of those out of employment should enter the labour market.

It is growing wages and employment that leads to the increased incomes which are being spent. Savings are among the lowest among us. We are essentially spending everything we earn. Due to this we can see that consumption will continue to be the main driver of growth. Considering inflation consumption should rise by around 4%,” R. Grajauskas summarised.

Not only Grajauskas is of such an opinion. Chief Economist for DNB in the Baltic States Jekaterina Rojaka concurs that the number of those in employment in Lithuania will grow, expanding the base of people who can contribute to consumption. However gradually the influence of wage growth will decrease and the economy will be aided by investment as well this year.

“Compared to last year it is one of the extra engines which should come online this year. Private investment had fairly good growth last year – around 10%, but public sector investment were not stagnating, they were in fact greatly decreasing. This is once again a consequence of European funding distribution cycles. This year funding should arrive in the sector. Thus there will be more infrastructure and more investment. Since 70% of government investment is based on EU funding,” the economist explained.

Export gives up first place, but remains important

During the crisis, with wage decreases, companies became more competitive and were able to sell their goods abroad at lower prices, given that a large amount of costs is wage payment. The era of export dawned due to this.

“Now things are going the other way. Consumption is rising rapidly due to wages, but this causes immediate problems for export. Already last year we saw goods exports contract in Q2 and Q3. Services export continues to grow because a number of service centres have been constructed. This year services will continue to be the factor to drag exports forward. Overall export growth should be around 3%. That’s the situation we have; when consumption rises, export suffers.

Around two thirds of our production is export oriented, thus manufacturing will be faced with greater difficulties. Those companies will have to invest into new technology in order to raise productivity. Lower added value production will find it ever harder to thrive in Lithuania and we will see a rise in high added value production such as lasers,” economist R. Grajauskas predicts.

According to J. Rojaka while export is not taking the leading role in the growth of Lithuanian economy, it can be expected for the export of Lithuanian goods to rise from 0-2% up to 3.5%. Meanwhile re-export will mostly depend on the political situation in Russia and other CIS states.
Changes in the export market are also positively influenced by growing oil prices.

Other than the aforementioned factors, the geopolitical situation remains important. It will influence not only export, but also investment and the overall level of the economy.

According to R. Grajauskas for now fears remain and this is reflected in investment decisions. Fears over an uncertain future, US President Donald Trump’s rhetoric and relations with Russia, the French and German elections.

“These fears somewhat decrease desire to invest in Lithuania, this is why foreign investment is far more passive than prior to the crisis. At the same time local enterprise could also be less inclined to invest because when you are uncertain of the future and the profitability of investment takes more than a year, then you can start thinking if it is worth it and what will happen with the country in general.

If the bad scenarios come true, political upheaval would arise. We are in the same ship with all other Eurozone countries. It is good we are on the ship, but currently we are faced with a time when this could have a negative impact on us. Because if expectations fall there, then it will transfer to us both through export and investment channels. Such an extreme scenario if we really have problems such as the EU practically crumbling, it would be an economic breakdown for us because our economy relies on the EU economy almost 100%, in terms of aid, investment and exports,” R. Grajauskas named the core factors which could overturn Lithuanian economic growth projections.

“When the Brexit negotiations begin and the real consequences surface, then we will be able to talk about long term investment and where it could be headed. The same concerns abound regarding terrorist attacks. On one hand this influences the investment atmosphere negatively, on the other hand there is little such concern with us,” J. Rojaka pointed to other factors influencing investment.
Nevertheless the economist notes that for now Scandinavian investors are little concerned by potential threats, they are more interested in specific cases.