Bank of Lithuania
2017-10-30
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Despite a certain slowdown, the growth of Lithuania’s economy remains robust. The biggest contribution to economic growth comes from favourable developments in international trade, which are exploited by the tradable sector, mainly manufacturing and transport. However, rising inflation, stalled employment growth, faltering flows of EU funds and lower agricultural harvest as a result of whims of the nature prevent the growth of the economy from gathering more pace.

Comment by Darius Imbrasas, Senior Economist at the Macroeconomics and Forecasting Division of the Bank of Lithuania

The growth of Lithuania’s economy remains robust, albeit slower than in the previous quarter. According to the preliminary estimate published by Statistics Lithuania, the country’s real GDP rose by an annual 3.4 per cent in the third quarter of 2017. The economic expansion is mostly driven by improvements in the international environment, which are mainly linked to the recently particularly strong growth in international trade, the acceleration of domestic consumption in advanced economies fuelled by the tightening labour market, as well as favourable financing conditions in the euro area. These factors fuel external demand for the Lithuanian goods and services.

Lithuanian manufacturing and transport sectors have been increasing the real exports of goods and services at a rapid pace as they take advantage of growing external demand. Increases in production capacity have also made a substantial contribution to export growth. In addition to investment in capacity building, manufacturing companies, which aim at higher volumes of production, have also spent considerable time trying to enhance their performance efficiency and, simultaneously, make more productive use of existing production capacity, which is now running at a historically high utilisation rate. Lithuania’s transport companies have also been successful in competing in external markets. Following the expansion of their fleet of trucks, these companies have managed to take advantage of the higher demand for transport services driven by active international trade. Solid performance in this sector has also been supported by the success of businesses in finding new trade partners in the markets of Western countries.

Economic growth has also benefitted from the upswing in the construction sector that is fostered by the gradual recovery of investment in buildings and structures, mostly driven by private sector investment financed from other sources than EU funds. The gradual recovery of the sector is also evidenced by the growing amount of construction work-in-progress. The important point here is that the flows of EU funds, which were used to finance more than one-tenth of the total volume of construction work during the period of the 2007–2013 multiannual financial framework, have not yet regained their previous level.

Economic growth was dampened by faster growth in prices and stagnant employment growth, which have a moderating effect on the growth of household consumption. Rising prices reduce household consumption by squeezing their purchasing power. After persisting at low levels for several recent years, inflation started to pick up in 2017 and reached 4.6 per cent in September, increasingly hampering the growth of household purchasing power and, simultaneously, consumption. In addition, household consumption has been curbed by the slower growth of income as a result of stagnant employment growth. For instance, the growth of employment contributed nearly 3 p.p. to the increase in the total wage bill between 2015 and 2016. This year, however, the factor of employment has had a downward effect on total wage bill growth. Nevertheless, it should be noted that household consumption remains one of the key drivers of the economy owing to the rapid growth of wages and increases in household income from sources other than labour.

Lower agricultural harvest affected by particularly rainy weather also had a dampening effect on Lithuania’s economic growth in the third quarter of 2017. Extremely rainy conditions in September forced the government to go as far as to declare an emergency situation as a result of heavy rainfall and flooding, which also had an impact on harvest. According to the preliminary estimates of Statistics Lithuania, the crop harvest this year should be nearly 5 per cent less abundant than last year. Rough estimates by the Ministry of Agriculture indicate that the losses sustained by farmers as a result of heavy rainfall may be as high as EUR 40 million.

The Bank of Lithuania estimates that the growth of Lithuania’s economy should slow down in the nearest forecast horizon yet it will remain relatively strong. Economic growth will be driven by favourable developments in main trade partners, which, coupled with growing investment, will facilitate the expansion of the tradable sector. The non-tradable economic activities will benefit from growing household income and the flows of EU funds, which are expected to recover. It is true, however, that the lack of workers and a shrinking workforce will have an increasingly dampening effect on economic growth, whereas the rapid growth of labour input may pose a threat to the competitiveness of domestic businesses.