Lithuania: Industry-led GDP growth surprised on the upside
The biggest contribution to GDP growth came from strong industrial growth, decent retail trade data and temporary boost in agriculture production owing to a good harvest.
Industrial production grew
by 4.5% in 2012 in spite of worsening economic situation of Lithuania’s major
trading partners. The result would have been even better if not a temporary
closure of AB “Orlen Lietuva” oil refinery (May-June 2012), which accounts for
more than a quarter of Lithuanian industrial production. Indeed, excluding
production of mineral products, Lithuanian industry grew at a robust 7.4% in
2012 – just a little slower than 8.1% in 2011 and 7.5% in 2010. Industrial
production growth accelerated to 7.1% in Q3 and further on to 9.3% in Q4 showing
a good momentum. Looking forward, the pace of growth should moderate, but
nevertheless remain in positive territory (more on industrial growth see Bronze medal for Lithuanian industry).
Retail trade (excl. sales of motor vehicles) growth remained decent rising by
3.2% y/y in Q4 2012. Overall, retail trade turnover increased by 4.5% in 2012
largely driven by the growth on non-food items (10.1%), while the sales of food
items did not grow as fast (1.4%). The increase in retail sale turnover was
particularly strong in the beginning of 2012 largely as a result of a pent-up
demand. Looking forward, the effect should fade-away and the growth will be
driven primarily by rising real purchasing power of households and falling
unemployment. In 2012 the average salary increased by 4.5% (5.7% in the private
sector), which first time since 2008 surpassed the pace of inflation (3.2%),
hence the real purchasing power of households have increased by 1.3%. Increase
of minimum monthly wage from LTL 850 (EUR 256) to LTL 1000 (EUR 290) from
1st January 2013 should contribute positively to the real wage growth
in 2013 (at least the official one). In addition, the number of employed people
have increased by 1.7% while unemployment dropped by 2%. The biggest challenge
remains big income disparities, youth and long-term unemployment (26.4% and 6.5%
respectively) and continuous emigration.Value added in agriculture sector increased by 8.6% in 2012 largely driven by a temporary increase in wheat exports as a result of exceptionally good harvest. Construction sector (-2.9%) was the only sector that contracted in 2012 as a result of stagnating real estate prices and weak demand for residential apartments.
Going forward, we expect that Lithuanian economy will continue to grow at a decent pace (3.5% in 2013) that will be driven by both export- and domestically-oriented sectors. Consumer confidence level is at its highest level since end-2007 whereas industrial confidence indicator is at levels compatible with positive industrial growth in the upcoming future. Successful issue of 5y EUR 400 m. euro-denominated bonds on January 28, 2013 also gives ground for more optimism. The issue was priced at 2.631% – significantly lower than EUR 400 m. tap on the same issue last April priced at 4.216%. Favorable borrowing conditions indicate that Lithuania regained the trust of international investors. The trust was augmented by the approval of state budget with an estimated deficit of 2.5% in 2013 and commitment by the newly-elected government to introduce euro in 2015.
The major threats remain the ongoing uncertainty about the euro zone sovereign debt crisis, still unresolved fiscal cliff issue in the US and the risk of rising commodity prices. The main internal threats remain weak domestic demand, emigration of labor force, structural unemployment and remaining uncertainties about the future actions of newly-elected government