D. Imbrasas: Draught has taken a toll on economic development
Poor harvest and more sluggish exporting sector growth slowed down the pace of Lithuanian economic development, however, these negative effects were partly offset by stronger retail trade. According to the flash estimate published by Statistics Lithuania, in the third quarter of 2018 the country’s real GDP grew by an annual rate of 2.7%, while in the first half of the year – by 3.7%. The next year’s projections remain broadly unchanged – the economy is headed for solid growth, however, momentum is expected to moderate.
Comment by Darius Imbrasas, Senior Economist at the Macroeconomics and Forecasting Division of the Bank of Lithuania
Significantly reduced grain harvest due to drought led to poor results in the agricultural sector. In the third quarter, due to harvest the agricultural sector usually generates more than 6% of value added to Lithuania’s economy – 3.5 times more than in other quarters. However, according to the preliminary data of Statistics Lithuania, this year the harvest should be 25% smaller than last year. This, in turn, puts downward pressure on economic development. Grain harvest decreased to a similar extent in 2006 and 2010; it resulted in a slowdown of economic growth by 1 percentage point at that time.
Slower economic growth also stemmed from more subdued expansion of manufacturing sector and transport activities. In the third quarter, increase in the manufacturing output of the main sectors (food, furniture, chemical) was smaller by a third compared to the first half of this year. The data shows that expansion of exports of services, 60% of which comprise transport services, slowed down considerably as well. Weaker increase in demand in the main trade partners have largely contributed to these developments. It should be noted that so far this deceleration should not be linked to the loss of competitiveness as Lithuanian exporters still manage to take an increasingly larger export market share in the main trading partners.
The negative impact of these activities was partly offset by more active retail trade. It was largely supported by increasing household consumption that was driven by rising household income and restrained inflation. Weaker growth of service and food prices contributed to lower inflation, while still rapidly rising wages and increasing social benefits put upward pressure on household income. Such robust wage growth is determined by a number of factors, the most important among them at this time is growing labour shortages, the minimum wage increase at the beginning of the year and government decisions to substantially raise wages for workers in healthcare and higher education. These decisions also led to rapid growth of social benefits, especially pensions, sickness, maternity and family benefits.
Construction sector is significantly contributing to the growth of domestic economy. Its activity is boosted not only by private sector investment to further expansion but also increased flows from EU funds. In the first quarter of this year it continued to decrease, in the second quarter it was up by a fifth, compared to the previous year and, according to available data, even stronger growth is expected in the third quarter. The activity in the construction sector should continue growing; this is reflected by raw material reserves of construction companies that have been continuously increasing for almost two years.
Next year, the development of domestic economy will remain strong; however, it will moderate somewhat compared to this year. According to the Bank of Lithuania projections, this year Lithuanian economy will pick up by 3.4% and in 2019 – by 2.8%. However, numerous risks remain that may result in economic development moving to a different path, such as weaker than expected economic growth of the main trading partners due to trade wars, uncertain outcome of Brexit negotiations and tightening global financial conditions; it is also unclear whether the recent upward trend in immigration will continue in the future.