The Lithuanian Economy

Monthly newsletter from Swedbank’s Economic Research Department

by Nerijus Mačiulis No. 2 • 9 March 2011

Not too great expectations

 The Lithuanian economic sentiment indicator reached its lowest point in the first half
of 2009 and has been edging up for more than a year now. However, it still remains
close to pre-crisis levels and below the positive area, which indicates dominating
pessimistic expectations.
 The recovery of sentiment and improvement of expectations in different sectors
have been far from even. While the services confidence indicator has been positive
since the beginning of 2010, construction confidence is still at -40 points. Retail
sector confidence was positive during most months of 2010, but dipped into the
negative area this year, mainly due to disappointing sales in December.
 Consumer confidence was increasing steadily for the first half of 2010, but this
growth of sentiment has been stalling more recently. Behind this stalling have been
bad weather, high heating costs, and soaring food prices. Expectations of even
higher inflation, along with a sluggish growth of wages and slowly declining
unemployment, are also contributing to a cautious recovery of consumer
confidence. Improvement of political climate could have important and significant
influence on consumer confidence.

Economic sentiment recovery is noticeable, Economic sentiment indicator, Jan 2007 - Feb 2011
(Component weights in parentheses)
albeit very uneven
50
The economic sentiment indicator bottomed out in
April of 2009 at -39 points. This was the lowest 30
value since Statistics Lithuania started keeping 10
records in 2002. All components of this indicator
were well into the negative area, with construction, -10

retail trade, and consumers leading the downturn. -30

A more rapid recovery of sentiment began in -50

January 2010; by February of this year, it had
-70
reached its highest value since September 2008,
when the bankruptcy of Lehman Brothers froze -90
credit markets and sent the already declining 2007 2008 2009 2010 2011
economy into a tailspin. Economic sentiment Industrial (40%)
Construction (5%) Retail trade (5 %)
Serv ices (30%) Consumer (20%)
The economic sentiment indicator is still in a
Source: Statistics Lithuania
negative area and reflects both objective and
subjective peculiarities of Lithuanian market
participants. Considering the extent of the economic There are more subtle and less tangible reasons
downturn (from peak to trough, the economy behind the low (negative) economic sentiment
contracted by 17%), it is hard to expect a rapid indicator. Even during booming years, when real
recovery of sentiment and expectations – structural disposable income was increasing by double digits
unemployment is still at historic highs, inflation is and unemployment was at its low, sentiment was
accelerating, and domestic demand remains only slightly above zero and reflected the prevailing
subdued. pessimism and skepticism of most market
participants. The overly strong focus on negative

Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000
E-mail: [email protected] www.swedbank.com
Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720
Nerijus Mačiulis + 370 5 258 2237. Lina Vrubliauskienė +370 5 258 2275.
 The Lithuanian Economy

Economic Research Department, Swedbank

Nr 2 • 9 March 2011

news in the media and the ongoing upheavals in Industrial confidence indicator, Jan 2008 – Feb 2011
the political arena are partly responsible for this 30
low-confidence phenomenon.
20
Construction confidence will lag behind the 10
rest 0
Not surprisingly, the overinflated construction sector -10
has suffered the hardest hit – at its lowest point, the
-20
construction confidence indicator read -84, which
could be described as “can’t get worse.” -30

-40
Construction confidence indicator, Jan 2008 – Feb 2011
-50
60 2008 2009 2010 2011
Industrial conf idence Assesment of stocks
40
Production expectations Selling price expectations
Export expectations Employ ment expectations
20
Source: Statistics Lithuania
0

-20 Despite the strong recovery in manufacturing, which

-40 is expected to reach all-time highs sometime this
-60 year, employment expectations became positive
only at the beginning of this year. Production and
-80
export expectations are also in the positive area,
-100
despite the short setback recorded at the end of
2008 2009 2010 2011
2010.
Construction conf idence Assement of demand
Employ ment expectations Price expectations
Demand expectations Delay s in pay ment
Amongst the strongest drivers of industrial
Source: Statistics Lithuania confidence are price expectations, which in
February hit their highest level in three years. This
means higher income for industrial companies
Although, at the beginning of 2010, confidence (along with higher costs of natural resources), but
started improving, mainly due to expectations of a does not help competitiveness or consumers of final
countrywide house renovation program, it goods, whose income is barely increasing.
plummeted again once it became obvious that the
renovation project had reached a dead end. A very Services confidence has suffered least and
early and extremely cold winter did not help to recovered fastest
improve expectations.
The economic downturn has affected the services
In the construction sector, the assessment of sector less than the other sectors. Even taking into
current demand is still very low; however, at the account the strongly affected financial sector, the
beginning of this year, demand expectations picked smaller drop in confidence can partly be explained
up slightly. There has been a noticeable by the less elastic demand of communications and
improvement in price and employment some other sectors. Also, companies in the
expectations, but as demand remains subdued, we services sector are probably a little less dependent
do not expect a rapid shift of sentiment, and the on fixed costs and could adapt to lower demand
construction confidence indicator is likely to stay in quicker (by reducing the number of employees).
the negative area for the rest of this year.
The services confidence indicator was in the
Industrial confidence lags behind the negative area for only 16 months, and its decline
sector’s performance was the most benign. It has been in the positive
area since the beginning of 2010 and is now
The industrial confidence indicator plunged rapidly recording the most positive sentiment since the
at the beginning of 2009 and, not surprisingly, summer of 2008. The uptrend is expected to
stayed at record low levels for more than a year. continue this year, especially considering the quick
Export-driven recovery in manufacturing improved recovery in transportation, financial and hotel
sentiment quickly – already, by January of 2010 services.
export and production expectations had turned
positive.

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 The Lithuanian Economy

Economic Research Department, Swedbank

Nr 2 • 9 March 2011

Services confidence indicator, Jan 2008 – Feb 2011 been over. However, sales in the last month of
70 2010 were disappointing (albeit increasing) and
caused a quick relapse of confidence in January.
50
Apparently, high expectations caused retailers to
30 overstock – the assessment of the current inventory
level spiked in January, whereas expectations of
10
orders in the next two-three months have dropped
-10
at a pace seen only during the height of the crisis.
Expectations recovered slightly in February, and the
-30 outlook for employment in the trade sector is still
positive. However, the biggest positive influence on
-50 confidence, as in industry, is the high expectation of
2008 2009 2010 2011
price increases.
Serv ices conf idence Assesment of situation
Demand expectations
Price expectations
Emply ment expectations Consumer confidence needs positive
Source: Statistics Lithuania impetus
The consumer confidence indicator has been
Unlike in the industry, construction, and retail negative for more than three years now and, until
sectors, service providers do not expect rapid price the beginning of 2010, was below the -40 mark. It
increases. Expectations for demand and has improved since, but stabilised at around -25 at
employment also entered the positive area in the the end of the summer and has stayed there since.
first two months of 2011.
Consumer confidence indicator, Jan 2008 – Feb 2011
Retail trade confidence is unexpectedly
100
volatile
80
Retailers’ expectations correctly signalled the first
60
signs of a pickup in domestic demand – in June,
confidence become positive after almost two years 40

of negative recordings. Three months later, retail 20

trade celebrated its first annual increase and has 0
been increasing ever since.
-20

Retail trade confidence indicator, Jan 2008 – Feb 2011 -40

-60
60
2008 2009 2010 2011
40 Consumer conf idence Household f inancial situation
Price f orecasts Major purchases f orecast
20 Probability of sav ings Unemploy ment expectations
Source: Statistics Lithuania
0

-20
Lithuanian consumers still have few reasons to be
-40
cheerful. Unemployment is high and to a great
-60 extent it’s structural – even as business creates
-80
new working places, the unskilled or those having
2008 2009 2010 2011
outdated and irrelevant competences find little
Retail trade conf idence Orders expectations
comfort in this development. The increase in
Inv entory lev el Business activ ity expec. average wages will be slow and probably not
Employ ment expectations Price expectations enough to offset increasing prices. Thus, the
Source: Statistics Lithuania purchasing power of the average household is
falling. Add to this the unstable political
However, the confidence in the growth of environment, riddled with corruption scandals (both
household consumption might have been fake and real), threats of impeachments, and empty
prematurely strong. After a few months of positive promises, and you have a perfect breeding ground
annual increases in retail trade, retailers were for negative consumer confidence.
expecting exceptionally strong sales in the Nevertheless, in some aspects households are
December – pre-Christmas period, thinking that two starting to feel better – the assessment and forecast
years of savings and ascetic behaviour must have of households’ financial situation and general

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 The Lithuanian Economy

Economic Research Department, Swedbank

Nr 2 • 9 March 2011

economic conditions are improving, and The government has few tangible instruments to
unemployment expectations are dropping rapidly. boost consumer confidence – public finances are
Consumer confidence is likely to be increasing this still strained, and there is no room to cut taxes or
year, but it would take a strong impetus to push it increase social benefits. However, a more positive
into the positive area. Amongst the strongest rhetoric and fewer pointless clashes between the
anchors of current expectations are rising consumer government and the opposition wouldn’t hurt.
prices (and future increases are well reflected in
At the end of the day, the linkage between the
inflation expectations). This affects mostly
economy and political climate is stronger than what
households of lower-than-average income, where
is often realized. Building household confidence by
almost half of the consumer basket consists of
focusing on growth oriented policies could make a
expenses on food and transport – two groups of
difference between a slow and a fast recovery in
products most affected by upheavals North Africa
Lithuania.
and the Middle East.

Nerijus Maciulis

Swedbank
Economic Research Department Swedbank’s monthly newsletter The Lithuanian Economy is published as a service to our
SE-105 34 Stockholm customers. We believe that we have used reliable sources and methods in the preparation
Phone +46-8-5859 1028 of the analyses reported in this publication. However, we cannot guarantee the accuracy or
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Legally responsible publisher
losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’s
Cecilia Hermansson, +46-8-5859 7720.
monthly newsletter The Lithuanian Economy.
Nerijus Mačiulis, +370 5 2582237.
Lina Vrubliauskienė, +370 5 268 4275.

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