The Lithuanian Free Market Institute (LFMI) has completed a fourth survey of macroeconomic variables in Lithuania, covering estimates for the first half of 1999 and forecasts until mid-2000. Vilnius Bank, Omnitel, and Lietuvos Telekomas funded the project. On November 25, LFMI held a press conference to present its fourth publication on the survey results.

The survey of macroeconomic variables, which is based on the expert consensus paradigm originating from the theory of rational expectations, was launched in 1997. The main goals of the survey are to elicit estimates of economic indicators from the opinion of market agents and to offer them for use in planning business activity. The data obtained from the expert survey is systematised and analysed in comparison with available official statistics. Approximately 50 experts took part in each stage of the survey.

The composition of the new study follows the same pattern as our previous editions. It presents the goals and methodology of the survey, outlines the indicators under investigation and methods of their analysis, and offers interpretations of the estimates and forecasts of individual macroeconomic variables. The closing section provides generalisations and comparative remarks. The survey covers the following indicators: the growth of gross domestic product, the share of shadow economy in GDP, inflation, the producer price index, unemployment, wages and salaries, household income, household investments and savings, earnings as a share of household income, unrecorded imports and exports, the profit margin, return on equity, invested profits, nominal interest rates on loans and deposits, the share of non-bank loans in the credit market, the expected interest rate on government securities, and the expected exchange rate of the litas to the U.S. dollar.

Each new stage of the survey has enhanced its quality and value. The data obtained from the surveys can be analysed from a temporal perspective and certain trends can be discerned. However, the period during which the last survey was conducted was marked by a great deal of uncertainty about the future, which explains a lack of expert agreement on some of the variables.

The Main Survey Findings

The arithmetic mean of GDP growth in the first half of 1999 was 0.2 percent but there was little agreement among the experts on this indicator. This was the first time that expert evaluations of GDP growth had varied so markedly. The forecasts were much more similar: the experts think that GDP growth will reach 2.2 percent by the middle of 2000. Both the expert estimates and the official figures of GDP growth in 1998 and 1999 varied more than their ex ante forecasts. In the LFMI survey, experts provide forecasts for a one-year period and have no opportunity to revise them half a year later, while the official data are constantly updated. As the four surveys show, expert estimates and forecasts are more moderate than official indicators.

According to the experts polled, inflation in the first half of 1999 was 2.6 percent, which is four times higher than the official figure. Both the experts and the official statistics report that inflation went down until mid-1999. The experts predict that inflation will be lower by mid-2000 than in 1998 and will stand at 3.9 percent. The official forecast for the year 2000 is 3.5 percent.

The experts think that the producer price index, which has been shrinking since 1997, will not fall further. The PPI in the first half of 1999 was estimated at 100.9. This is lower by 1.1 than the estimate of the Lithuanian Department of Statistics. There was no clear consensus on this indicator among the experts polled. Also, there are slight differences in the definitions of the PPI as used by LFMI and the LDS. The experts predict that the PPI will rise up to 102.4 by mid-2000.

The estimates of the shadow economy and unrecorded foreign trade do not show any marked changes as compared with the previous polls. The estimates of mid-1999 and the forecasts for mid-2000 are the same: the shadow economy is put at 23 percent of GDP, unrecorded imports at 20 percent of total imports, and unrecorded exports at 14 percent of total exports. The surveys show that the share of the shadow economy in GDP has been falling from 1997. The estimates of unrecorded foreign trade follow the same pattern.

According to the experts polled, the level of unemployment in cities and towns has been rising steadily since mid-1998. It was 10.2 percent in mid-1998, 11.6 percent in mid-1999, and is expected to reach 11.8 percent by the middle of 2000. The increase in the level of unemployment is not as rapid as reported by the Labour Exchange. However, the unemployment indicators released by the Labour Exchange are still much lower than the expert estimates.

The survey shows that average monthly personal earnings* are growing, but not as rapidly as was predicted a year ago. Personal earnings are expected to increase by only 3 percent by mid-2000, from 984 litas in mid-1999 to 1,015 litas in mid-2000.

Household income has changed quite negligibly. In the first half of 1999, a slight increase was reported but it did not reach the level predicted in 1997 (698 litas per month per household member). According to the experts polled, monthly household income per household member was 665 litas in mid-1999 and is expected to grow to 684 litas by mid-2000. If so, the growth will not exceed 3 percent. The difference between the expert estimates and official statistics remains large (about 45 percent).

The share of personal earnings in household income was estimated at an average of 82 percent in cities and towns and at 44 percent in rural areas. The estimates for the period from 1997 to 2000 remain unchanged. The LDS estimated this indicator at 63 percent for cities and towns and at 47 percent for rural areas.

Contrary to the popular belief that people in Lithuania save very little, the experts have indicated a steady and quite sizeable portion of household savings and investments. As this survey shows, savings and investments comprise 25 percent of household income. The reported size of household savings is much bigger than the official statistics.

As the experts note, the profit margin and return on equity have been shrinking steadily since 1997. Analysis of the data from the National Stock Exchange of Lithuania and corporate data from the Central Securities Depository shows that the declining profit margin has been due to large-scale losses sustained by individual enterprises. This is indicative of an increasing differentiation among Lithuanian companies. The experts predict a slight increase in the average profit margin and return on equity in the coming year, which is associated with positive changes in the market.

Invested profits were on the rise until 1998. No increase was predicted in the last survey. In mid-1999, invested profits comprised 57 percent of all profits. Fifty six percent is forecasted for mid-2000.

Despite the significant changes in the estimates of many other indicators, no demonstrable changes are expected to occur in the money market. The survey participants predict a slight increase in interest rates on 6 to 12-month loans in litas (from an average of 13.6 percent in mid-1999 to 13.9 percent by mid-2000). Interest rates on loans in US dollars are expected to remain the same (11.4 percent). Likewise, the experts predict a minor rise in interest on 1 to 3-month deposits in litas (from 6.4 percent to 6.7 percent respectively) and no changes in interest on deposits in US dollars (4.6 percent).

The average yield on one-year T-bills will be 12.1 percent from the second half of 1999 until mid-2000. It should be noted that the experts reported their forecasts in June and July, when T-bill auctions went smoothly and interest on inter-bank loans fluctuated within an interval lower by 10 points than in October. Such forecasts suggest that the experts had not anticipated any breakdown in state finances, or if they did, they had not expected it to last long and thought the government would finally reduce borrowing and so the yield on T-bills.

The LFMI survey participants believe that the share of non-bank loans comprises one fifth of total loans drawn by economic agents.

Sixty percent of the experts polled think that the exchange rate of litas to the US dollar will remain the same until mid-2000 (in the prior surveys, the same opinion was reported by 78, 68, and 72 percent of those polled).

As the not too distant past shows, predicting political developments and their consequences is the biggest challenge faced by institutions and persons who forecast economic indicators. The situation is further complicated if scenarios of possible solutions are not clearly defined. In this respect, the most sensitive indicator is GDP growth, which has no meaning at a time of political battles. In such conditions, forecasting is impossible without investigating political scenarios. Projected values are determined not only by market signals but also by the choice of political action, and this makes expert estimates vary significantly. Prognoses made by extrapolating statistical data are also based on a likely scenario of political developments and a definite amount of operational information. If it is assumed that the likelihood of erring in projecting political developments is the same for experts and the authors of official forecasts, the accuracy of prognoses should be determined by available market information. So the experts' superiority in grasping the knowledge communicated by the market assumes greater importance.