2018-03-19
Exports, investment and consumption to feed through the future growth of the Lithuanian economy
Upon consideration of positive developments in the international environment and a recovery in investment, the Bank of Lithuania is revising up the growth projections for the domestic economy.
‘The time is now favourable for Lithuanian businesses to strengthen their muscle – invest in instruments that would increase operating efficiency and strengthen competitiveness. Meanwhile, a lower inflation than last year and the still strong expected wage growth will increase the purchasing power and consumption of households,’ says Raimondas Kuodis, Deputy Chairman of the Board of the Bank of Lithuania.
Foreign economies exhibiting growth
The Lithuanian economy is projected to grow 3.2 per cent this year, a revision of 0.4 percentage points above the mid-December 2017 forecast. This change was basically driven by the international environment – notably in the euro area and other advanced countries, the economic expansion was much higher than expected.
However, in some foreign trade partners important for Lithuania (Latvia, Poland) economic activity will increase less than last year. Russian imports are so far also projected to grow less as well. It is therefore believed that Lithuanian export growth will moderate compared to last year. Nevertheless, this year the forecast for export growth, compared to the mid-December 2017 one, is being increased from 4.5% to 5.7%.
Investment – a significant factor of expansion
The growing demand for exported products will encourage businesses to invest, particularly in the development of production capacities such as equipment, information technologies, vehicles. This will boost imports, as a significant share of production facilities or technologies is imported from other countries. Investment within the construction sector has been growing since 2017 as well, boosted by the construction of non-residential buildings and engineering structures. This investment should continue to firm this year as the influx of EU support funds should recover following a two-year trough.
Household consumption will increase
It is projected that economic growth will not only be boosted by growth in exports and investment but also by the strengthening purchasing power of households. The Bank of Lithuania projects that the unemployment rate (in 2018 it will be 6.7%, in 2019 – 6.6%) will continue to moderate gradually both this year and next year, while the labour market demand will encourage businesses to raise wages further. The increase of the minimum monthly wage since the beginning of the year will also contribute to that, within the services sector in particular. Hence household income is likely to continue on its upward path, boosting consumption. As a result, household consumption will contribute markedly to the intensifying growth of the entire economy. This year’s forecast for wage growth is being revised from 6.1% up to 6.7%, while in 2019 wages should rise 6%.
Price increases are less pronounced
As was projected, inflation has been abating: it is projected to be at 2.7% this year, decreasing by a fourth from last year (3.7%), while in 2019 it should fall even more – to 2.2%. The moderation in price growth this year is partly due to an ample supply of food commodities and their quite large stocks. This is the reason for a less pronounced increase in the prices of meat, milk and dairy products, and non-alcoholic beverages for consumers. Due to global trends, the upward climb of fuel prices is less strong. These factors of the international economic environment curb inflation not only in Lithuania but also in the neighbouring countries – Latvia and Estonia. Moreover, unlike last year, this year service prices in our country are climbing at a slower pace and excise duties are not raised that significantly.