2013-08-19
The less-than-expected inflation in recent months, as well as the limited unit labour cost growth and favourable global raw material price trends, promote significant reduction of the inflation forecasts. The country’s general economic development is basically in line with earlier assessments; therefore the gross GDP growth outlook remains unchanged. It is expected that this year the country’s economy will grow by 2.8 per cent, while next year — by 3.5 per cent.
The Bank of Lithuania reduced the inflation forecast this year by 0.6 percentage points — to 1.4 per cent, while next year’s indicator was reduced by nearly a whole percentage point — from 2.4 per cent to 1.5 per cent.
“There still aren’t any fundamental preconditions due to which in the nearest future the global prices of energy and food commodities would increase. Therefore, if geopolitical factors do not prevent it, inflation this year and next year in Lithuania shouldn’t be very large,” says Aurelijus Dabušinskas, Director of the Economics Department of the Bank of Lithuania.
Such trends are a result of favourably evolving external and internal factors. The Food and Agriculture Organisation of the United Nations predicts an exceptionally large global grain crop. In addition, market expectations and the projections of international institutions indicate that the price of petroleum in 2013–2014 will decrease, compared to 2012. Rapidly growing productivity in the domestic market resulted in only a small rise in unit labour costs, with the increase in minimum wages, which had a limited effect on prices.
These factors also favourably affect the inflation forecast for 2014; however, next year its effect will be weakened by decisions on taxes. For example, next year, in spring, excise duties on tobacco and alcohol will be increased.
Lithuania’s economic development is still greatly influenced by export, and recovering domestic demand, especially larger-than-expected private consumption, also add to the growth. Private consumption is increased by the growing income of the population, while the latter is influenced both by increased wages (this was also influenced by increased minimum wage) and increased employment.
Although the effect of the bountiful harvest last year, which significantly increased export at the end of 2012 and beginning of 2013, has faded, export expansion now is favourably affected by larger-than-last year production of petroleum. However, this can be explained by a base effect, since a year ago export of petroleum had been halted due to repairs at the refinery. Export, excluding petroleum, is growing less than before due to a rather unfavourable external environment. Nevertheless export growth isn’t slowing down as much as was expected, therefore the perspectives for this year and the coming year have been improved.
At the Bank of Lithuania’s website you can become acquainted with the latest medium-term macroeconomic forecasts.