D. Imbrasas: Economic growth is driven by household consumption, investment and exports
The development of Lithuania’s economy continues at a rapid pace, even though less favourable developments in the international environment has dampened external demand growth, thus resulting in significant slowdown in export growth in the first half of 2018. Construction sector, following a few years’ break, is again among the economic activities contributing the most to the growth of domestic economy. The Bank of Lithuania’s experts continue to expect the development of domestic economy to remain relatively robust this year.
Comment by Darius Imbrasas, Senior Economist at the Macroeconomics and Forecasting Division of the Bank of Lithuania
Economic growth in Lithuania remains strong. According to the flash estimate published by Statistics Lithuania, in the second quarter of 2018 the country’s real GDP grew by 3.7% over the year (in 2017 – 3.9%). This was determined by several factors: rising activity in trade and transport sector and strong domestic demand.
Domestic demand is driven by both household consumption and investment. Household consumption is boosted by robust wage growth, which has been on an upward path continuously since 2011, and prices, growing more moderately than in 2017, as well as social benefits raised at the beginning of the year. Investment growth is largely influenced by increasing companies’ efforts for automation and digitalisation of production processes due to labour shortages and rising labour cost, the level of capacity utilisation that is at its historic highs and rather favourable environment for borrowing in the financial sector. Enhanced influx of EU support funds also has a positive impact on investment and contributes to growing activity in the construction sector.
However, export growth was noticeably slower in the first half of 2018, compared to the previous year. This slowdown largely contributed to a more moderate development of the domestic economy in the first half of the year. Development of exports of Lithuanian origin and re-exports was weaker across many groups of goods as well. Such export developments were largely driven by moderating growth of foreign demand. However, data shows that thus far Lithuanian exporters remain competitive – even with conditions being less favourable they gained export market shares in the major trading markets.
Demand for Lithuanian exports is waning among many of the major trade partners. In the euro area, which is the most important trade partner for goods and services of Lithuanian origin, this slowdown stems from a more sluggish overall economic growth. This resulted due to bad weather conditions, strikes in the metal processing industries and uncertainty surrounding fiscal stimulus in some euro area countries. For example, in Italy companies temporarily slowed down investment as they wait for a decision on extension of investment allowances to be made. The slowdown of demand in Russia’s market, which is particularly important for Lithuania’s re-exporting companies, mainly stems from Russia’s finishing restocking inventory that was diminished during the recession.
This year, the development of Lithuania’s economy will remain strong; however, it will moderate somewhat compared to last year. The Bank of Lithuania did not adjust its projections and continues to expect for the economy to grow by 3.2% in 2018, and in 2019 – 2.7%. However numerous risks remain that may result in economic development moving to a different path. Among them – uncertainty surrounding recent upsurge in global economic growth as well as lack of clarity as to how long will economic growth in the euro area remain subdued. More intensive use of the EU support funds as well as different development of migration flows could also significantly change current expectations regarding economic development. To add, risks related to the outcome of Brexit negotiations, tariff wars, weak labour productivity growth and tighter financial conditions in global markets should be taken into account as well.