D. Imbrasas: After last year’s remarkable performance, this year’s projections are more temperate
The good results for the last quarter determined the strongest growth of the Lithuanian economy in 2017 over the last five years. The largest contribution to such economic development stemmed from the favourable development of international trade, which induced particularly active development of our tradable sector. Growth of the Lithuanian economy could have been even stronger, yet started shrinkage of employment and still faltering flows of European Union structural funds prevented it. This year economic growth in Lithuania will be dampened by a further decline in the number of persons employed and a weaker foreign demand growth.
Comment by Darius Imbrasas, Senior Economist, Macroeconomics and Forecasting Division, Bank of Lithuania
After having slackened its growth pace slightly in the mid-year, the Lithuanian economy retained it at the same level in the last quarter of 2017. According to the flash estimate of Statistics Lithuania, Lithuania’s real GDP grew by 3.6 per cent in the fourth quarter of 2017 and 3.9 per cent over 2017. The last time Lithuania’s economy grew so strongly was five years ago. The drivers of economic growth remained practically unchanged throughout the year.
Economic development was mainly spurred by the improved international environment, which boosted the demand for Lithuanian exports on account of intensified international trade. It should be noted, however, that strong growth of world trade last year should be considered as exceptional – trade growth significantly outpaced global GDP growth, although in the last few years its growth was weaker than the development of global GDP. This was mostly due to a substantial pick-up in the demand for capital goods in the world last year. Among the components of aggregate demand, it is namely investment that is most related to foreign trade; therefore, an increase in investment boosted imports and exports in various countries.
Lithuania’s tradable sector – manufacturing and transportation – took advantage of growing foreign demand and rapidly increased its exports. In 2017 both manufacturing and transport companies increased their sales volumes in foreign markets rather steadily, accelerating their growth rate even more in the second half-year. It should be noted that export growth was also boosted by a recovery in investment, which expanded companies’ production capacity. Moreover, to expand their production volumes, companies have for some time already been consistently attempting to improve the efficiency of their production processes and utilisation of available production capacities: for example, manufacturing companies reached the historically highest level of production capacity utilisation at the end of last year.
Construction was one more sector to have significantly contributed to Lithuania’s improved economic development in 2017. While in 2016 the value added of the construction sector fell by nearly 8 per cent, in mid-2017 it already posted a similar growth rate. The value added generated by construction is likely to increase even more. These construction sector developments are mainly associated with a gradual recovery in investment in buildings and constructions. However, this investment is not associated with EU structural funds: last year, its flows did not increase; it is, however, likely that this year, EU funds will be one of the main drivers behind growth in the construction sector.
Household consumption remained one of the main factors that boosted economic growth in 2017, albeit its contribution to economic development lessened in the second half-year. Such development was driven by faster price increases and a decline in the number of persons employed. Rising prices limited household purchasing power and consumption. After being at low rates for the few recent years, inflation started rising in 2017, peaking above 4.0 per cent in the second half-year. 2011 was the last year when we observed such a rise in prices. However, the latest data suggest that this year the rise in prices will be not that strong and will less limit household consumption. In 2017, household consumption growth was also dampened by another significant factor – a decline in the number of persons employed. Nevertheless, strong growth of wages and salaries outweighed the contribution of declining employment.
According to the Bank of Lithuania, in 2018 Lithuania’s economic growth will decelerate yet will continue to be quite strong (2.8% of GDP). There will be two reasons for that. First of all, foreign demand for Lithuanian goods and services will moderate compared to 2017, aggravating the possibilities for exporters to further expand their sales volumes. The second reason is that the further decline in the number of persons employed and a deceleration in wage growth will limit household consumption growth. However, the unfavourable impact of the above-named factors is likely to be somewhat offset by the recovery in the flows of EU structural funds that will contribute to faster investment growth.