A Survey of Macroeconomic Variables in Lithuania
Estimates for the first half of 2001 and forecasts for the period from mid-2001 until mid-2002
The Lithuanian Free Market Institute (LFMI) presents the results of the eighth stage of a survey of macroeconomic variables in Lithuania, covering estimates for the first half of 2001 and forecasts for the period from mid-2001 until mid-2002. The survey was launched in 1997 and is based on the estimates and forecasts of market participants. Fifty-two experts representing prospering Lithuanian enterprises took part in the latest survey.
The LFMI survey of macroeconomic variables is based on the expert consensus paradigm originating from the theory of rational expectations. The main goals of the survey are to reflect market participants' valuations of economic variables, to compare these estimates with official statistics and to offer interpretations of the most noticeable differences.
The survey covers the following variables: the growth of gross domestic product, the share of the shadow economy in GDP, inflation, the producer price index, unemployment, personal earnings, household income, household investments, household 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, the expected exchange rate of the litas to the U.S. dollar, and the tax burden as a ratio of GDP.
Survey Results
According to the results of the survey carried out by LFMI in the middle of 2001, households and enterprises began to recover after the recession in 1999 and 2000. The respondents think that the national economy is picking up and will continue to grow next year.
According to the LFMI survey respondents, gross domestic product grew by 3.3 percent in the first half of 2001. This estimate is lower than the official statistics. As the survey shows, Lithuania's economy is expected to grow by 3.6m percent in 2001 despite the global economic slowdown.
A rapid expansion of export is one of the attributes of a developing economy. As the survey respondents report, decreasing flows of unreported goods have had a positive effect on the volume of import and export. Unreported imports are estimated to account for 17 percent of total imports, while unreported exports are put at 11 percent. Complicated tax and customs procedures, high unemployment and price differences with the neighbouring countries have boosted illegal trade. A planned increase in excise duties as of the next year is likely to intensify these trends. Therefore, market participants do not anticipate any marked reduction in the flow of illegal goods.
As the survey shows, the level of prices has increased more rapidly than the official sources report. According to the respondents, inflation was 2.5 percent in the first half of 2001 and consumer prices will have increased by 3.4 percent by the end of this year. The rise in prices is mainly attributed to growing prices of imports from the EU, caused by the strengthening euro, and an increase in the prices of monopoly services, such as electricity, water and fixed communications.
The survey respondents think that the tax burden has not decreased yet and is not expected to reduce next year either. An increase in the tax-exempt minimum income has been postponed. Excise duties will be increased next year, and other tax rates are to be reviewed. This may further exacerbate the existing tax burden.
According to the survey results, the rate of unemployment reached 14.5 percent in the first half of 2001. The LFMI survey respondents expect a continued growth of the economy, corporate profits and sales. Unemployment in cities is expected to fall gradually, but the situation in towns and rural areas will not improve. If more radical structural changes, especially in agriculture, fail to be made, unemployment will continue to exceed 17 percent
As the survey indicates, the revival of the national economy is already reflected in household indicators. According to the respondents, net earnings rose to 1,023 litas in the middle of 2001. The official statistics, however, do not confirm this trend. This suggests that remuneration in other forms is increasing more rapidly than salaries paid under employment contracts.
The market participants believe that growing earnings are also reflected in higher household income. Monthly household income amounted to 1,588 litas in the middle of 2001, which constitutes almost 600 litas per household member. As the survey indicates, earnings will continue to grow and unemployment will cease to increase. This is likely to augment household income.
Household savings and investment were estimated to account for 27 percent of household income. The survey respondents believe that improving economic conditions will allow households to save more and to spend more on consumer durables. Better financial opportunities and a growing feeling of stability is likely to encourage households to take more loans debt. Thus, households are expected to invest more than save in the future.
According to the respondents, the worst period for the business sector is already over. After hitting a record low a year ago, the profit margin and return on equity began to grow. The average profit margin was estimated to be six percent and return on equity was 9.2 percent in the middle of 2001. However, the data from other sources, such as the National Stock Exchange and the Central Securities Depository do not show any improvements in these indicators. As exports and local demand are growing, enterprises that are capable of enhancing management and attracting new investment are expanding their markets and outrivaling inefficient businesses.
According to the survey, the average share of invested profits rose to 61 percent over the year and will continue to grow. However, if taxed, reinvested profits will decrease markedly. Such a restriction on investment would damage individual companies and the general investment climate alike.
As the survey respondents predict, the litas-to-dollar exchange rate will remain about the same, 4.09 to 1, by the middle of 2002 despite the replacement of the anchor currency. The re-pegging of litas will create stable conditions for trade with the EU and have a positive effect on export-oriented companies. However, no major improvements are expected on the national scale, as many enterprises will not benefit from the re-pegging.
The market participants estimate that loans and deposits in litas and US dollars are getting cheaper. A reduction in the interest rates of the anchor currency, the US dollar, on international markets, scant banking crediting and intense inter-bank competition have brought down the price of crediting resources. The respondents predict that the trend towards falling interest rates on the money market will remain next year.
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Although the experts polled have no doubts about the growth of the national economy, they do not anticipate any huge leaps forward. Such modest expectations are due to internal as well as external factors.
This year the purchasing power of the Lithuanian population and investments have grown. This is largely due to falling interest rates, continued governmental initiatives and stability on both domestic and international markets. However, the situation changed markedly in the autumn. The first one hundred days of the Brazauskas administration have shown the degree of its resolve to pursue necessary policies. New market restrictions have been imposed. Pension reform has been postponed. Proposals to tax invested profits and real estate of individuals have been revived. These policies, coupled with a lack of transparency in decision making, have undermined confidence in the government and increased uncertainty on the market.
Foreign markets have seen major changes as well. The ongoing military actions in the Middle East are likely to affect the global macroeconomic situation, including Lithuania, in the near. The unstable political environment forces enterprises to review their business plans. This is likely to slow down investment processes and economic development. Admittedly, the influence of the military interventions on both macroeconomic and microeconomic processes will depend on how long they persist.
The slowdown in the US and EU economies is another external factor affecting the growth of Lithuania's economy. It leads the governments and central banks in these countries to launch expansive fiscal and monetary policies, such as reducing interest rates and taxes or increasing public spending. These measures are designed to augment household consumption and investment. On the other hand, the US and EU economies will feel the effects of these policies much later when the income and optimism of consumers increase. Therefore, low demand on external markets is likely to restrict Lithuanian exports in the near future.
It may be concluded that the forecasts the LFMI survey participants produced in July 2001 should be viewed with caution due to major changes on domestic and foreign markets. If the unstable political situation persists, it will not only impede Lithuania's foreign trade but also lower local demand. Under such circumstances, market participants are likely to be more modest in their estimates and forecasts in the future.
