The Lithuanian Economy

Monthly newsletter from Swedbanks Economic Research Department by Nerijus Maiulis, Vaiva ekut and Laura Galdikien No. 2 19 March 2013

Export-supported growth last year was held back by low expectations; prospects look better in 2013
GDP growth eased from 5.9% in 2011 to 3.6% last year. Export growth accelerated significantly in the second half of 2012, while household consumption growth was stronger in the first half of the year. Lower inventory levels and weaker investments were the reasons why economic growth was slower in 2012 than in 2011. Industrial output, except for refined petroleum products, grew at a similar rate as in 2011, while investments decreased due to weak expectations. We expect investment will catch up this year as conditions are improving.
Growth slowed as expectations weakened
In the last quarter of 2012, growth was somewhat slower than in the previous quarter but remained very robust. Net export and household consumption were the main contributors to GDP growth. Export growth accelerated in the last quarter, although household consumption continued its gradual decrease, from 7.9% in the first quarter to 3.2% in the last quarter. As expected, overall GDP growth was significantly weaker in 2012 than in the previous year. The main reason was not weak final demand but rather restrained expectations.
Contributions to GDP growth
15% 10% 5.0% 5% 0% -5% -10% -15% 2010 2011 Household consumption Inv estment (excl.inv ent.) Net export Source: Statistics Lithuania, Swedbank 2012 Gov ernment consumption Inv entories GDP growth -1.0% 1.1% 0.9% 5.5% 5.6% 6.6% 5.7% 3.9% 4.4% 4.1% 2.1%

and investments. The lower level of inventories was the main reason why the economy grew more slowly in 2012 than in 2011. This means that economic growth last year was held back mostly by the companies weaker outlook; this can at least partly be explained by the parliamentary election in Lithuania and the looming recession in the euro area. On the other hand, companies were able to sustain high export growth by relying on the fastergrowing Baltic and CIS economies. Weak expectations weighed down investments as well. Gross fixed capital formation contracted by 2.5% in 2012. Investments in fixed tangible assets increased by only 0.5% last year and contracted by 9.5% in the fourth quarter compared with the same quarter a year ago. This was the first time since 2010 that investments fell. Despite a growing need to invest in order to raise efficiency and capacity, investments in acquisition of machinery and equipment remained at relatively low levels, increasing by only 6.1% last year. We believe that investments will accelerate this year as companies are operating at close to full capacity. Thus, further output growth requires more business investment. Investment might also be lifted somewhat by the 25% increase in the monthly minimum wage, as some companies will probably invest in less labor-intensive technologies. Moreover, there is not only a need, but also the availability, of financial resources for investments. Last year's profits rose by 12.6% to LTL 9.4 billion and were the highest since 2007. Rock-bottom interest rates and high bank liquidity are also creating good conditions for raising the financial

Inventories and investments contributed negatively to growth, as companies reduced their inventories

Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000 E-mail: ek.sekr@swedbank.com www.swedbank.com Legally responsible publisher: Magnus Alvesson, +46-8-5859 3341. N erijus Maiulis, +370 5 2582237. Vaiva ekut, +370 5 258 2156, Laura Galdikien, +370 5 258 2275

The Lithuanian Economy Monthly newsletter from Swedbanks Economic Research Department, continued No. 2 19 March 2013

leverage, which is still well below the 2008 peak and also the 2005 level.
Liabilities of non-financial corporations
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2005 2006 2007 2008 2009 2010 2011 Equity to liabilities Long-term f inancial liabilities to total liabilities Current f inancial liabilities to total liabilities 2012 14.6% 13.9% 39.9% 71.3% 74.9% 96.0%

32.9%

the construction sector. After eight consecutive quarters of growth, value added in the construction sector started contracting again in the second half of last year. Less demand from the public sector and low confidence in the private sector likely led to this contraction. Since this sector suffered the most during the downturn, its value added is still 47% below the pre-crisis level. An increasing number of new building permits and a likely vitalisation of renovation of Soviet-era buildings could reverse this trend in 2013.

Retail trade growth lost steam

Annual retail trade growth decreased from 6.1% in 2011 to 3.9% in 2012. Consumers were more cautious due to slower wage bill growth and weaker expectations. Rising prices lowered fuel consumption. Food consumption increased by only 1.4%, which was nevertheless higher than the 0.8% growth in 2011. However, retail trade growth was still mostly driven by non-necessity consumption. Rising prices of such necessities as housing and food resulted in slow consumption growth of lowwage-earning households. Housing and fuel inflation eased at the end of last year and the beginning of 2013. This easing and acceleration in wages should have a positive effect on necessity consumption this year. We forecast real wage growth to be positive.

Sources: Sstatistics Lithuania, Swedbank.

Construction sector is weak link

Despite positive growth rates in recent years, GDP is still below pre-crisis levels. In the fourth quarter, output was 5% lower than in the second quarter of 2008, when the Lithuanian economy reached its peak.
GDP dynamics by sectors, %
40% 20% 0% -20% -40% -60%
Industry Trade, transp. Professional, scientific act. Construction Real estate Financial,insurance Arts, entertainment Manufacturing Agriculture Public administr. Information, communication GDP

1% 1%

7%

1%

7% 8% -7% -3% -20% -5%

Manufacturing supported by strong exports

-15%

-47%

Growth from trough to Q4 2012 Contraction from peak to trough Current position: from the peak to Q4 2012
Source:Statistics Lithuania, Swedbank

In the fourth quarter of last year, value added grew in annual terms in all sectors, except for construction. Thanks to booming exports, the highest increase was recorded in the manufacturing sector. Its value added grew by 10.7% in the last quarter and was 7% above the pre-crisis peak level. From 2011 to 2012, value added increased by 8.6% in agriculture, forestry and fishing; 7% in information and communication; 6.3% in trade, transport, food, and the accommodations sector; 6% in manufacturing; 4.2% in industry; and 2.6% in real estate activities. However, it decreased by 5% in

Growth in Lithuanias industries accelerated in the second half of last year. Industrial production increased by 8.7% in the fourth quarter in annual terms, compared with 6.6% in the third quarter. However, this was not sufficient to increase industrial production by more than 3.7% in 2012, compared with 6.4% in 2011. The decline in industry growth in 2012 can be explained by the 30.6% contraction in the manufacturing of refined petroleum products in the second quarter of last year - the result of maintenance works on the oil refinery. Manufacturing of refined petroleum products recovered strongly in the second half of the year, when its annual growth reached 28.8%. After a slowdown in the third quarter of 2012, annual growth of manufacturing, except for refined petroleum products, picked up again in the last quarter, reaching 10.6% - the fastest pace of growth last year. Foreign demand remains the main driver of manufacturing growth, as most of this sector's production is exported. Last year, real exports of goods and services increased by 11.2% - not much less than the 14.1% registered in 2011. Nominal exports of goods to Germany, which is one of the main markets for Lithuanian-origin exports, fell by

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The Lithuanian Economy Monthly newsletter from Swedbanks Economic Research Department, continued No. 2 19 March 2013

4.3%, and to France by 13.5% in nominal terms. Despite the contracting economy in the euro area, exports were expanding rapidly to Latvia and Estonia, where they increased by 21.8% and 34.9%, respectively. Exports to CIS countries were growing by 22.4%.
Industrial production and manufacturing, Q1 2008 Q4 2012 (Left scale m LTL at constant 2010 prices; Right scale yoy growth at constant 2010 prices)
18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2008 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% 2009 2010 2011 2012 Mining and quarrying Electricity, water supply Refined petroleum products Manufacturing (excl.refined products) Manufacturing (excl.refined products), yoy (rs) Industry, yoy (rs) Source: Statistics Lithuania, Swedbank

Industrial confidence indicator

40 30 20 10 0 -10 -20 -30 -40 -50 2008 2009 2010 2011 2012 2013 Industrial conf idence Production expectations Assesment of stocks Export expectations Source: Statistics Lithuania

Industrial production is likely to maintain its upward trend as the industrial confidence indicator rebounded to -4 in February 2013 after falling in November 2012 to its lowest level (-21) since 2009, due to the political uncertainty caused by last year's parliament election. Production and export expectations bottomed out as well, while the assessment of stocks is at its lowest level since mid-2011.

One of the main growth factors in 2013 will be rising investments, as the depressed expectations had probably led companies to postpone them. Expectations are set to improve this year. However, the situation in the euro area is likely to remain tense, not least due to the uncertainty surrounding the rescue programme in Cyprus. Unemployment numbers in the euro area have reached historical highs. Therefore, export performance will depend on companies ability to find new markets and offer competitive goods. A further increase in efficiency, however, will be hard to achieve without investments. Nerijus Maiulis Vaiva ekut Laura Galdikien

Swedbank Economic Research Department

SE-105 34 Stockholm Phone +46-8-5859 1028 ek.sekr@swedbank.com www.swedbank.com Legally responsible publisher Magnus Alvesson, +46-8-5859 3341. Nerijus Maiulis, +370 5 258 2237. Vaiva ekut, +370 5 258 2156. Laura Galdikien, +370 5 258 2275

Swedbanks monthly newsletter The Lithuanian Economy is published as a service to our customers. We believe that we have used reliable sources and methods in the preparation of the analyses reported in this publication. However, we cannot guarantee the accuracy or completeness of the report and cannot be held responsible for any error or omission in the underlying material or its use. Readers are encouraged to base any (investment) decisions on other material as well. Neither Swedbank nor its employees may be held responsible for losses or damages, direct or indirect, owing to any errors or omissions in Swedbanks monthly newsletter The Lithuanian Economy.

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