Despite geopolitical woes Lithuania s economy enjoys balanced growth

Transcription

1 Lithuanian Economic Outlook Despite geopolitical woes Lithuania s economy enjoys balanced growth Indrė Genytė-Pikčienė Chief analyst Economic Research Department DNB Markets 30 th of May, 2014

2 2000 I 2000 III 2001 I 2001 III 2002 I 2002 III 2003 I 2003 III 2004 I 2004 III 2005 I 2005 III 2006 I 2006 III 2007 I 2007 III 2008 I 2008 III 2009 I 2009 III 2010 I 2010 III 2011 I 2011 III 2012 I 2012 III 2013 I 2013 III 2014 I 2014 III 2015 I 2015 III Lithuania will reach the pre-crisis peak in the beginning of this year 190 Real GDP index (sa & wda adjusted; 2000 = 100), % Forecast Lithuania EU-27 Estonia Latvia Source: Eurostat

3 Externally oriented sectors gained weight 20.8 Value added structure by economic activity, % Agriculture Manufac - turing Construction Wholesale trade Retail trade Transport and storage Hotels and restraunts IT and comm. Finance and insurance Real estate services Professional, scientific and tecnical activities 3 Source: Eurostat

4 Exports the main engine, which drove Lithuania out of recession 170 Exports of goods and services index, swda, (2008 = 100), % Total exports Goods Services Source: Eurostat

5 Lithuania started living according its means Current account and foreign trade balance, ratio to GDP, % CAB FTB Source: Bank of Lithuania, Eurostat

6 Greece Italy Finland Portugal Spain Slovenia Croatia Czech Republic Netherlands European Union Belgium France Austria Denmark Germany Estonia Slovakia Hungary Sweden Poland United Kingdom Lithuania Romania Latvia Lithuania ranks among the leaders of the EU according to the GDP growth Real GDP, annual change, % Source: Eurostat

7 Re-exports surged the most Exports structure, LTL bn Exports of services Re-exports Mineral products Exports of Lithuanian origin excl. mineral products Exports of goods Source: Statistics Lithuania

8 Key exports markets of Lithuanian goods and services Lithuanian Origin Goods (excl.mineral products) Germany Sweden Russia Poland 14.0% 7.3% 7.1% 6.7% 712 meur 699 meur 655 meur meur Latvia 6.5% 634 meur Russia 42.7% meur Re-exports of goods Belarus Latvia Poland 10.9% 10.5% 8.5% meur meur 829 meur Estonia 4.9% 474 meur Russia Rusija 25.4 % meur Services Baltarusija Belarus Germany Vokietija Latvia Latvija 11.8 % 9.9 % 5.5 % 535 meur 452 meur 249 meur Poland Lenkija 4.8 % 216 meur Source: Statistics Lithuania, Bank of Lithuania, Eurostat, DNB

9 EXPORTS MARKETS OF LITHUANIA 9 Source:

10 Situation in the EU still remains challenging European Union Economic engine is still sluggish (GDP growth is seen at 1,6% in the EU) Unemployment rate at its highs 10,5%; youth unemployment at 23% Still weak domestic demand; business and consumer confidence recovers slowly Periphery s problems are not solved, but the worst phase is behind Stagnating economy doesn t help to solve the fiscal imbalances. *DNB(NO) and European Commission forecasts 10 Source: Eurostat Unemployment rate in 2013, end of period, % Greece 27.6 Spain 26.1 Croatia 17.5 Cyprus 16.8 Portugal 15.4 Slovakia 14.1 Bulgaria 13.1 Italy 12.6 Ireland 12.2 Eurozone 11.9 Latvia 11.6 Lithuania 11.0 France 10.2 Poland 10.0 Slovenia 9.7 Hungary 9.2 Estonia 8.8 Belgium 8.4 Finland 8.3 Sweden 8.0 Romania 7.3 UK 7.1 Netherlands 7.0 Denmark 6.8 Czech. R. 6.8 Malta 6.7 Luxembourg 6.0 Germany 5.2 Austria

11 Estonia Bulgaria Latvia Romania Lithuania Sweden Denmark Czech Republic Slovakia Poland Finland Croatia Slovenia Netherlands Germany Hungary EU-28 UK Eurozone France Spain Belgium Ireland Portugal Italy Greece Public indebtedness has swelled over the last 10 years General government debt, ratio to GDP, % Source: Eurostat

12 2006 I 2006 II 2006 III 2006 IV 2007 I 2007 II 2007 III 2007 IV 2008 I 2008 II 2008 III 2008 IV 2009 I 2009 II 2009 III 2009 IV 2010 I 2010 II 2010 III 2010 IV 2011 I 2011 II 2011 III 2011 IV 2012 I 2012 II 2012 III 2012 IV 2013 I 2013 II 2013 III 2013 IV Peripheral countries diverge from the core 111 Real value added index (2008 = 100; SWDA), % Peripheral countries Core Peripheral countries: Ireland, Greece, Spain, Italy, Cyprus, Portugal. Source: Eurostat, DNB estimates. Source:

13 ECB doves prevail due to fading inflation ECB kept tight monetary policy comparing to its major peers. ECB s mandate does not address fiscal euro area s problems. Well below target inflation forces ECB to act. However, the effect of the ECB policies on the table (LTROs, key interest rate cuts, even QE) is seen to be limited. Nevertheless, all the easing efforts should keep euro area s interest rates at the bottom for at least a couple of years Annual inflation in the Eurozone, % ECB target slightly less than 2% Source: Bloomberg, Eurostat

14 Markets have already priced in the expected stimulus from the ECB in June EURUSD cross forecast EUR is cursed to weaken eventually due to: Different macroeconomic conditions on both sides of the Atlantic. Japanese deflationary decade for the euro area vs. energetic US recovery More hawkish Fed market participants expect Fed to quit QE3 at the end of this year and start raising interest rates in the mid of Bloomberg, DNB Markets

15 Rising consumer confidence lifts hopes for gradual private consumption recovery Consumer confidence and private consumption 15 Source: Capital Economics

16 World US Eurozone Japan UK EM China India Brazil Russia Faster global growth should give a hand to euro area s economy Real GDP, annual change, % F 2015F Source: TVF, DNB(NO)

17 Lithuania s ties with Russia: How vulnerable are we? 17 Šaltinis:

18 2008 III 2008 IV 2009 I 2009 II 2009 III 2009 IV 2010 I 2010 II 2010 III 2010 IV 2011 I 2011 II 2011 III 2011 IV 2012 I 2012 II 2012 III 2012 IV 2013 I 2013 II 2013 III 2013 IV 2014 I Russia s economy started to slow down even before the conflict 8 Real Russia's GDP, annual change, % Source: Trading Economics

19 Russia chokes despite sweating at max capacity Russia s economy has hit its production possibility frontier. Supply side is weak and uncompetitive, while domestic consumption remains strong and feeds from imports. Capital base cries for renewal. Lack of progress on structural reforms. Employment growth potential almost exhausted, shortage of high-quality labour force. The CBR is caught between higher inflation and weakening economy Unemployment rate and capacity utilisation rate, % 19 Source: Capital Economics

20 Q Q Q Q Q Q Q Q Q 2014 Russia-Ukraine conflict triggered off substantial capital flight % -16% -USD48bn EURRUB RTSI$ Index Russia's financial account flows USD bn Source: Bloomberg, The Central Bank of Russian Federation

21 Channels for spillover effect on Lithuania ENERGY IMPORTS MARKET 4 EXPORTS 21

22 Lithuania exports mostly food, while imports mainly energy Structure of Lithuanian origin exports to Russia in 2013, % Lithuania's imports from Russia in 2013 by product, % Furniture, 5 Building materials and metals, 6 Plastics and rubber, 6 Chemicals, 4 Agriculture and food processing products, 46 Chemicals, 3 Electricity, 2 Natural gas, 14 Other, 6 Wood, paper, printing, 8 Means of transport, 9 Machinery and equipment, 12 Oil and its products, Source: Statistics Lithuania

23 The EU has several sources for natural gas However, Lithuania is among those who are totally dependent on Russia Natural gas imports of the EU by country of origin in 2012, % Quatar, 10 Algeria, 14 Other, 7 Russia, 34 Norway, Bulgaria Lithuania Czech Republic Slovakia Slovenia Hungary Belgium Germany Luxembourg Romania Netherlands Natural gas imports from Russia in 2012, share of domestic consumption, % Finland Estonia Latvia Greece Poland Austria Croatia Italy France Source: Bloomberg, Eurostat

24 Re-exports to Russia more than doubled since Lithuania's exports (excl. mineral products) to Russia Reexports, bn LTL Exports of Lithuanian origin, bn LTL Share of reexports,% Source: Statistics Lithuania

25 Russia has been absorbing Lithuania s service exports greedily Exports of services, annual change,% Structure of exports of services to Russia in 2012,% 34.7 Transportation Land transport By air 4.7 By sea 1.3 To Russia Globally Travel Other services Source: Statistics Lithuania

26 DOMESTIC DEMAND TRENDS 26 Source:

27 Lithuania is changing the gear: recovering domestic demand replaces weaker exports GDP components according to expenditure approach, annual change, % GDP Final consumption expenditure of households Final consumption expenditure of general government -3.6 Gross fixed capital formation Exports of goods and services Imports of goods and services 27 Source: Statistics Lithuania

28 Domestically oriented economic activities grow rapidly Dynamics of retail trade turnover and consumer confidence Construction output at constant prices (2010=100), % Total Building Civil engineering Retail trade turnover, annual change, % (LHS) Consumer confidence (RHS) Source: Eurostat, Statistics Lithuania

29 -8.7 Real wages started to recover in Lithuania only in Average gross monthly wages, annual change, % Lithuania Latvia Estonia IQ Average monthly gross wages, 2012, EUR Norway Denmark Ireland Belgium United States Sweden Netherlands Finland United Kingdom Austria France Germany Italy Spain Slovenia Greece Portugal Czech Republic Slovakia Estonia Hungary Poland Latvia* Russian Federation* Lithuania* Romania* Belarus* Bulgaria* Ukraine* *2013 data Source: UNECE, national statistics offices, DNB

30 The bottlenecks in the labour market have emerged Unemployment rate, seasonally adjusted, end of period, % 39.2 Total Youth IQ IQ EU-28 Estonia Latvia Lithuania 30 Source: Eurostat

31 Demographic pressure persists, however re-emigration picked-up in 2013 Workers' remittances and compensation of employees in 2013, % of GDP Lithuania Bulgaria Luxembourg Croatia Latvia Slovakia Belgium Portugal Romania Hungary Slovenia Poland Czech Republic France Spain Austria ES (2012) Finland Italy Greece Ireland Sweden Netherlands United Kingdom Source: Eurostat, Statistics Lithuania Migration dynamics in Lithuania, thousands Emigrants Immigrants (Lithuanian) Other immigrants

32 E E E Gap between wage and productivity growth is nearly bridged Rapid wage growth is a threat for the competitiveness of the Baltics Gross value added and compensation per worker, annual change, % 25 Estonia 40 Latvia 25 Lithuania Productivity Wages 32 * Value added per employee Source: national statistics offices, Eurostat

33 Lithuania finally exceeded the EU average investments to GDP level Real investments, annual change,% RE investments Machinery, transport and other equipment Estonia Czech Republic Slovakia Slovenia Hungary Austria Sweden Italy Latvia Denmark Poland Germany Lithuania EU Spain Netherlands Finland Portugal France Ireland UK Gross fixed capital formation expenditure, ratio to GDP, % Transport equipment Machinery and equipment 33 Source: Eurostat

34 Lithuania safely complies with Maastricht criteria There are no objective reasons that would prevent Lithuania to introduce the euro in Jan-2015, however official acceptance by European authorities is required. Long-term government bond yield, percent Government debt to GDP, percent Criterion Ratios in April 5,4-6,5 3, ,4 Price stability, percent 1,1 1,7 0,6 Government budget deficit to GDP, percent 3 2,7 34 Source: Bank of Lithuania

35 Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct K1 2006K3 2007K1 2007K3 2008K1 2008K3 2009K1 2009K3 2010K1 2010K3 2011K1 2011K3 2012K1 2012K3 2013K1 2013K3 Expected currency changeover adds fuel to the housing market 5000 Residential RE transactions 150 House price index (2006 = 100) Total New dwellings Existing dwellings Source: Centre of Registers, Statistics Lithuania

36 Lithuania s macroeconomic outlook Export-led growth model makes the country exposed to external shocks, given its high degree of trade and financial openness. Need for export diversification. Easing fiscal austerity and benevolent inflationary climate fuelled domestic demand recovery. Businesses increase investments to avoid internal imbalances (demographic, emerging labour market bottlenecks, etc.) and to remain competitive. The adoption of Euro would provide Lithuania with the access to the ECB s liquidity, enhanced financial stability will raise confidence in the eyes of foreign investors. 36 Source: DNB Real GDP, annual change, % Key macroeconomic indicators, % F 2015F 2016F Average annual inflation, % Average gross monthly earnings, annual change, eop, % Unemployment rate, eop, %

37 Thank you! DNB analytical publications are available at: P&D_WQ_2011