2017-08-03
D. Imbrasas: Growing international trade also benefits Lithuania’s economy as a whole
Lithuania’s economic development continues at a rapid pace – in the second quarter it was only slightly slower than in the first. This rapid economic development was driven by the improved international environment, leading to a revival in international trade, which benefited economic activities producing tradable goods, such as manufacturing and transport. In the second half of this year, Lithuania’s economy should retain a similar pace of development. The risk of less favourable economic development remains relevant, albeit decreasing recently.
Comment by Darius Imbrasas, Senior Economist, Macroeconomics and Forecasting Division, Bank of Lithuania
Lithuania’s economic development continues at a rapid pace – in the second quarter it was only slightly slower than in the first. According to the flash estimate of Statistics Lithuania, in the second quarter of 2017 the annual rate of growth in real GDP stood at 3.9 per cent. In particular, the improved international environment had an impact on the rapid economic development. This improvement is most closely related to the recovery in demand for capital goods worldwide, particularly in emerging market economies (e.g. China). In addition, a significant impact was seen from rapidly growing economies of raw material-exporting countries, economic development in the US and euro area. These factors lead to a revival in international trade, which is beneficial for economic activities producing tradable goods, such as manufacturing and transport.
With an upsurge in international trade, growth in manufacturing increases as well. Its volume grew in both export and Lithuania’s markets: export was increased most by manufacturers of machinery and equipment, metal products, wood and furniture, while sales in the Lithuanian market – by manufacturers of metal products and furniture. With the aim to increase production volumes, this activity’s undertakings not only invest in increasing production capacity, but for a long while have been attempting to improve the efficiency of operations, at the same time more effectively using available production capacity. Currently the level of utilisation of production capacity is at a historic high.
Having significantly increased the truck stock in 2016, Lithuania’s transport companies managed to take advantage of the growing demand for transportation. It is increased by the growing volume of international trade. Such developments in the transport sector are underpinned not only by foreign demand, which is increasing less than the scale of activities of transport companies. Good performance of the activity is also a result of companies being able to find new trade partners within Western markets: Lithuania’s transport companies successfully compete with carriers from other countries and they take up an increasingly larger share in export markets.
Economic development in this quarter is slightly slower than in the previous quarter, which may be a result of rising prices of goods and services. At the end of 2016, annual inflation amounted to 1 per cent, escalating to 3.5 per cent in mid-2017. This limited the growth of the purchasing power of households. Nevertheless, household consumption continues to grow, albeit at a slower pace, due to the employee-conducive labour market and particularly robust wage growth, which will continue to be affected by the growing shortage of qualified staff.
According to the Bank of Lithuania, in the second half of the year Lithuania’s economic development will remain similar. The improving economic situation in the main trade partners will contribute to such economic development, and this will encourage growth in exports. Private consumption will continue to be an important factor in economic growth. It is expected that investment will contribute more heavily to economic development – investment will be driven by rising demand both in the exporting and domestic demand-oriented sectors. Investment will also be spurred by the expected increase in flows of EU support funds.
Albeit less than before, the risk of less favourable economic development still looms. It is most closely related to the recently observed yet likely short-lived resurgence in global foreign trade, increasing imbalances in China, still-existing uncertainties regarding fiscal stimulus and protectionism in the US, and geopolitical tensions in East Asia and the Middle East.