OREANDA-NEWS. October 04, 2010. More rapid than expected growth of export during H1 2010 improved economic outlook for the Baltic countries, however, the analysts of “Swedbank” are of the opinion that only the “second driver of the economy” – domestic consumption – would accelerate Lithuania’s recovery from the bottom of crisis in 2011-2012, reported the press-centre of Swedbank.

Concerns of households about the future are expected to begin slightly subsiding in 2011 as income starts growing.

In the most recent macroeconomic outlook of Sweden and Baltic States developed by ”Swedbank”, the analysis of the Bank revised the forecasted macroeconomic indicators of Lithuania, Latvia and Estonia envisaging the most rapid growth of economy in 2012.

According to projections of “Swedbank”, in 2010 Lithuania’s GDP will grow by 0.5%, in 2011 – almost by 3%, and in 2012 – by 4.5%.

“Export growth related with the revival of global trade had a great impact on the stabilisation of the situation of the Lithuanian economy in 2010. We estimate that this year, compared with 2009, export volumes will grow by 10.5%, considering price development implications. However, this is only one source of the country’s economic growth and in view of the slowdown of the rates of recovery of the global economy its negative impact on the national economy of Lithuania will be relatively smaller. On the other hand, we see signs that in 2011 and 2012 the second driver of economic growth – domestic consumption – will strengthen, therefore we retain optimistic forecasts of economic growth for the next year”, - says the Head of “Swedbank Markets” Lithuania Tomas Andrejauskas.

Recovery of domestic consumption is prevented by concerns

“Swedbank” analysts foresee that after further reduction by 5% this year household consumption will start gradually growing in 2011. “While stabilisation is observed already since the middle of this year and expectations of consumers are also improving, the average resident of Lithuania will feel the improvement of economic situation of the country only when unemployment reduces and wages start growing”, - says T. Andrejauskas.

The Head of “Swedbank Markets” Lithuania notes that reduction of domestic consumption is predetermined both, by objective reasons and expectations of the country’s residents. In his opinion, people have learnt the crisis lesson and now are trying to save money on account of consumption to protect themselves against unexpected shocks in future. Such model of social behaviour is quite common during and after crises when people are trying to accumulate a subsistence reserve and reduce debt burden.

“Since the beginning of 2008, the savings of residents in banks, irrespective of crisis, have grown by more than LTL 2bn and in July 2010 amounted to LTL 25.2bn. This shows how much money is “taken from turnover” when there is uncertainty about the future. When expectations of the public improve, part of this money will undoubtedly be returned to consumption,” – notes T.Andrejauskas.

Therefore, growing income of residents and migration of savings to consumption, rather than the development of loans will be the main contributor strengthening domestic consumption. Seeking sustainable economic growth consumption should reflect not the availability of loans, but the actual purchasing power.

“Swedbank” analysts forecast that unemployment after reaching its peak this summer will start reducing in H2 2010 and by the year-end will reach 17%, in 2011 – 15.5%, and in 2012 – 14%.

“Reduction of unemployment will also be influenced by gradually declining business investments in the creation of new jobs and emigration. Furthermore, speaking about unemployment one can’t forget that a certain part of registered unemployed must be working “in shadow”. Consequently, as the economic situation improves and the government takes respective measures, attempts should be made to legalise such jobs. This would help the government to save considerable amounts of money from residents who are honest taxpayers and to reduce the budget deficit of the country“, - says the Head of “Swedbank Markets”.

According to him, elections to the Parliament pending in 2012 might also have a certain impact on domestic consumption. “Furthermore, domestic consumption will be affected by the winding-up of measures taken by the Government to balance the country’s budget. However, it is extremely important that such decisions are not made too early, predetermined by political factors, and that they guarantee sustainable long-term economic processes. Otherwise the Maastricht criterion – budget deficit amounting to 3% of GDP – will not be reached by end-2012“, - says T. Andrejauskas.

Export will be driven by Europe

In 2010, performance of Lithuanian exports was stronger than expected and became the key driver of economic growth. According to “Swedbank” analysts the measures of optimisation of costs implemented by business of Lithuania also contributed to that enabling to maintain competitiveness, as well as higher than expected demand in the countries of Northern Europe and Germany.

Nevertheless, as the recovery of economies of the main trade partners of Lithuania next year will fade out, in 2011 the recovery of export volumes will also be slower than this year. Next year exports are likely to increase by 6.5%, considering the impact of price developments, and in 2012 – by 7.7%.

“The industry generating low or average added value still remains the backbone of the Lithuanian export – the most rapid growth is envisaged in chemical and timber industries and transport sector. To help the country to refocus on the export of goods and services of higher added value will need more than one year and considerable investments. We welcome the actions of the government promoting the development of high technologies and alternative energy sectors and we, as a bank, are ready to continue financing such investments“, - says T. Andrejauskas.

Unemployment – a Pan-Baltic problem

“Swedbank” analysts upgraded the forecasts of key economic indicators for Latvia and Estonia. It is estimated that in 2010 the growth of Estonian economy will be 2.2%, and Latvian economy will subtract by 1.5%. Growth rates forecasted for Estonia in 2011 will reach 4.5% and for Latvia – 3%, and in 2012 – 4.5% for Estonia and 4.2% - for Latvia.

In the opinion of bank analysts, economy of Estonia will benefit from the introduction of euro on 1 January 2011, and economy of Latvia – from export growth, however, while high unemployment (in 2011 unemployment in Latvia is expected to reach 17.5% and in Estonia – 15.5%) in the neighbouring countries, likewise in Lithuania, will remain one of the key challenges.

Swedbank Economic Outlook is here: http://www.swedbank.lt/lt/previews/privatiems/4/21