OREANDA-NEWS. November 26, 2007. Lithuania’s economic growth is set to remain strong in 2008 at 7 percent year-on-year, but uncontrollable inflation and excessive domestic demand may harm the competitiveness of the economy, AB DnB NORD Bankas analysts said, reported the press-centre of DnB NORD Bankas.

According to DnB NORD Bankas experts, a shortage of labour force and consumption that is built on excessively optimistic expectations of consumers have forced the classic wage-price spiral to take off. Accelerating inflation discourages people from saving and encourages employees to put their employers and the Government under pressure to further raise of wages.

“A vicious circle has occurred – demand, which has been growing far too rapidly, has diminished the competition and caused higher product prices and increasing profitability of businesses, however, in line with a severe lack of labour force that leads to rapidly growing wages further forcing excess spending and inflation. An increase in private earnings is a basic factor in preventing accelerating emigration, though its pace already exceeds the growth of labour productivity leading to a slump in Lithuania’s competitiveness in foreign markets,” – said Dr. Vadimas Titarenko, Economic Research Team Manager of DnB NORD Group, when introducing the most recent Lithuanian Economic Outlook.

As consumption, the key driving force of the national economy, has been far above the level of exports, the foreign trade deficit and the current account deficit (CAD) have risen sharply. In the first half-year CAD made approximately 15 percent of GDP, and is likely to reach 17–18 percent in full year 2007. Both deficits are largely financed from loans, therefore the level of total foreign debt of Lithuania is growing at a fast pace – at end 2005 the foreign debt to GDP ratio accounted for 51 percent rising to 66 percent in the mid-year.

DnB NORD Bankas analysts say that even if Lithuanian economy’s temperature is lower than in Estonia or Latvia, the Government has to take immediate action in order to avoid economic overheating: to battle inflation, enhance competitiveness through improving business environment, and approve the National Investment Promotion Program without delay. To their opinion, due to approaching elections the Government will hardly be able to pursue a strict fiscal policy.

“National budget revenues (EC support excluded) are forecast to grow more than one-fourth in 2008 even though the social fee will not be longer in place, and the personal income rate will shrink by 3 percentage points. The Government seemingly assumes that inflation will remain high next year and borrowing will be stay at the current levels,” – DnB NORD analysts say.

Overall performance of export-oriented companies, which has been rather successful this year, and the national debt, which has not been high yet, allow the experts to be positive about the outlooks of economic growth and forecast a soft landing.

“We think there will be a modest slowdown in the economic growth in 2008 – GDP annual change will stay at 7 percent, rapid earnings growth will remain and inflation will make about 6 percent at the year-end. The national budget deficit will not decrease and the current account deficit will remain under threat. Next year there should be moderate decrease in borrowing growth rates and the real estate prices should stop rising if not decline,”– Dr. V.Titarenko says.

Loan portfolio growth has been more compatible with the pace of personal and corporate incomes growth. If at the end of the previous year the real estate price correction was short term and caused by the disappointment in the financial and real estate markets due to failure to adopt the Euro, this year the current situation allows to speak about a moderate changes in trends. As the construction sector growth has been especially remarkable and given the current price/income level the real estate market has almost reached a break-even point at which increasingly more power goes to the buyer in contrast to the previous years.

According to DnB NORD Bankas analysts the recent economic growth is largely triggered by four economic sectors: transport, manufacturing (especially food, construction materials, metal articles, chemical products, plastics and furniture production), domestic trade and construction. Dynamics of agriculture receiving major support from the national authorities and Brussels still lacks momentum.

Full report see here: http://www.dnbnord.lt/en/about/archive/?cid=2&nid=572