A Survey of the Lithuanian Economy 2001-2002
Estimates for 2001 and forecasts for 2002
The Lithuanian Free Market Institute (LFMI) presents the ninth economic survey of Lithuania, providing estimates of economic variables in 2001 and forecasts for 2002 based on the opinion of market participants. This survey was conducted in January and February 2002.
Market participants polled by LFMI at the beginning of 2002 see the Lithuanian economy growing and the financial situation of Lithuanian households and companies improving. They predict that these trends will remain through 2002. However, market participants’ results did not indicate any rapid upturns in the business sector, households and the country’s economy in general, so their estimates and forecasts can be viewed as moderately optimistic.
According to market participants, Lithuania’s gross domestic product (GDP) rose by 4.2 percent in 2001, or less than the official statistics indicate. The Lithuanian economy is expected to grow at a similar rate, 4.4 percent, in 2002. It is predicted that the growth of foreign trade will slow down from 13 to 12 percent for imports and from 16.4 to 15.8 percent for exports.
The LFMI surveys show that the informal economy has been steadily shrinking over the past years. According to market participants, the informal sector accounted for 19 percent of GDP in 2001. It is anticipated, however, that the shadow economy will cease to contract and remain at the same level in 2002 as a year before.
As in previous surveys, market participants think that prices rose more than the official sources indicate. According to the LFMI survey results, consumer prices grew by 2.6 percent, while produce prices increased 1.8 percent in 2001. It is forecast that prices will rise more in 2002: consumer prices, by 3.3 percent, and producer prices, by 2.8 percent in 2002. An increase in monopolistic and administrative prices and tax hikes will have the biggest effect on the level of prices.
According to market participants, the tax burden decreased from 41 percent of GDP in 1999 and 2000 to about 36 percent in 2001. It is anticipated to grow again and reach 38 percent of GDP in 2002.
The results of the survey show that Lithuanian companies have overcome the difficulties caused by the Russian crisis and are enhancing their financial situation. According to market participants, the profit margin, after hitting a record low, 4.6 percent, in 2000, began to grow and reached 6.1 percent in 2001. Growing profitability led to an increase in return on equity, which was estimated to be 10.4 percent in 2001. However, other sources do not confirm these trends. The situation in the business sector will continue to improve, but the profit margin and return on equity are expected to grow less in 2002 than last year, by 6.3 percent and 10.9 percent respectively.
The share of reinvested profits has steadily increased in the past years. According to market participants, Lithuanian companies invested 66 percent of their profits in 2001, but this year the share of reinvested profits is expected to decrease to 56 percent. This can be related to the abolition of a zero-tax rate on reinvested profits starting from 2002. Lithuanian companies are increasingly investing in science and innovations. Expenses on science and innovation are estimated to account for about 7 percent of companies’ total expenses.
Despite growing company investments, sales and profits, the rate of unemployment, according to market participants, did not change and remained almost the same in 2001 as a year before, 13.9 percent. This estimate is higher than the official indicator of the Labour Exchange. It is likely that the impact of economic growth was outweighed by other factors, such as a heavy tax burden, strict employment regulations, unclear prospects of business development and restrictions imposed on individual business activity. According to LFMI survey participants, a steady economic and company growth will bring about a gradual decrease in the level of unemployment, down to 13.5 percent at the end of 2002.
The country’s improving economic situation was reflected in people’s income. According to LFMI survey participants, in 2001 earnings grew by 7 percent and reached the highest level, 1,035 litas, since 1997. Despite growing earnings, household income was estimated to grow very negligibly, 0.6 percent. Average monetary income per household member was estimated to be 650 litas per month. This means that the growth of earnings was outweighed by lower income received from other sources than hired labour, including income from individual business activity, pensions for working pensioners and interest on deposits (caused by falling interest rates). It is forecast that in 2002 average earnings will grow to 1,061 litas per month, while household income per household member, to 680 litas per month.
As in previous surveys, market participants think that average earnings and household income are almost one and a half times higher that the official sources indicate. This difference indicates that a sizeable portion of income goes unreported.
In 2001 households saved and invested the same share of income, a quarter, as a year before. While savings grew by one percent, investments, or long-term consumption expenditures, fell by 9 percent. Given that income rose very little but prices showed a sizeable increase, this suggests that current consumption expenditures rose at the expense of household investments, while consumption as such grew very little. Market participants think that growing income will lead households to save and invest more. In 2002 household savings and investments are expected to rise by 3 and 5 percent respectively.
LFMI survey respondents predict that the litas/US dollar exchange rate will grow in 2002 and amount to 4.1 litas for one U.S. dollar at the end of the year.
About the survey
The main goals of the LFMI survey, launched in 1997, are to provide estimates and forecasts of macroeconomic variables in Lithuania based on the opinion of market participants and to analyse factors that can influence their opinion. The survey gives an opportunity to compare the estimates of market participants with official statistics and data from other sources. Interpretations of the most distinct differences are offered.
The LFMI survey is based on the expert consensus paradigm originating from the theory of rational expectations. This theory states that, if a connection exists between an economic variable and certain processes in the economy, market participants will use all available information to make estimates and forecasts. It is the expectations of market participants that determine their actions and the trends of the economy.
LFMI survey participants provide estimates of the following economic indicators: the growth of gross domestic product (GDP), the rate of the shadow economy to GDP, import and export growth, inflation, changes in consumer and producer prices, the rate of unemployment, the rate of the tax burden to GDP, the litas/US dollar exchange rate; personal earnings, household income, household savings and investments; the profit margin, return on equity, return on investments and companies’ expenses on science and innovation; interest rates on loans and government securities, and the share of non-bank loan market.
Forty-four respondents participated in the latest survey. The results of the survey will be presented in a Lithuanian-English publication. The survey was funded „GlaxoSmithKline,“ „Lietuvos telekomas,“ „Linas,“ „Ragutis“ and „Skanska Statyba.“
