A Survey of the Lithuanian Economy 2002-2003 [2]
2002 estimates and updated forecasts for 2003
The Lithuanian Free Market Institute (LFMI) presents the eleventh survey of the Lithuanian economy covering market participants’ estimates of economic variables for 2002 and updated forecasts for 2003.
The survey conducted in January 2003 shows that in 2002 the Lithuanian economy grew rapidly. Personal income increased, but financial indicators of companies slightly deteriorated. Market participants predict a steady growth in 2003. Household income will continue to rise and corporate indicators will improve.
According to market participants, the Lithuanian economy grew by 5.2 percent in 2002, stimulated by a rising domestic market and export growth. An upsurge in investments in 2001 was another important factor. It is predicted that this year the economy will maintain a similar rate of growth – 5.1 percent. A rising domestic market and export growth will remain the main sources of economic development. The prospects of EU membership are strengthening positive expectations of market participants.
The growth of Lithuania’s foreign trade slumped in 2002. With a marked decline in export growth, the growth of import exceeded tat of export. According to market participants, export rose by 12 percent and import went up by 12.2 percent in 2002. The appreciation of the litas against both the euro and the U.S. dollar and declining economies in the U.S. and the euro area were the main reasons for a falling export growth in 2002. Import growth reflected rising domestic consumption and investments. Market participants predict that foreign trade will grow at a slightly higher rate in 2003. Export will increase by 12.3 percent, while import will rise by 12.8 percent. As these forecasts show, import will continue to grow faster than export.
As the LFMI survey shows, the shadow economy accounts for one-fifth of GDP in Lithuania. The informal sector expanded slightly in 2002 but this year it is expected to contract, albeit quite negligibly. It is likely that the expansion of the shadow economy was mostly related to rising taxes, especially excise duties and a growing tax burden on sole proprietors.
According to market participants, consumer prices went up by 1.3 percent in 2002 and they will grow much more in 2003, by 2.4 percent. A lower price rise in 2002 is related to the appreciation of the litas against the U.S. dollar and increased domestic competition. On the other hand, prices were driven up by growing household income and consumption. Also, the prices of monopoly telecommunication services and state-regulated electricity and excise duties on fuel and cigarettes were raised.
Growing domestic consumption, stimulated by falling unemployment and rising earnings and household income, will be the main factor of price rise in 2003. Further increases in excise duties will intensify the trends.
A steady economic growth has led to a fall in unemployment. According to LFMI survey participants, the rate of unemployment fell from 13.9 percent at the end of 2001 to 12.7 percent at the end of 2002. The survey shows that unemployment will continue to fall and will stand at 11.8 percent at the end of 2003.
The tax burden diminished slightly in 2002 and comprised 36 percent of GDP. This year it is expected to increase to about 37 percent and exceed the level of the past two years. As the LFMI survey shows, recent tax hikes were offset by a fairly high rate of economic growth and growing income from sources that are either tax-exempt or taxed at lower rates. It is likely that the forecasts for 2003 were mostly affected by a new procedure for personal income taxation.
Financial indicators of Lithuanian companies deteriorated slightly in 2002, but they are expected to improve this year. According to market participants, the average profit margin stood at 5.6 percent in 2002 and will grow to 6 percent this year. Average return on equity was estimated to be 9.7 percent in 2002 and is expected to rise to 10.3 percent in 2003. Falling corporate indicators were related to declining export markets, changing exchange rates, increased domestic competition and changes in corporate taxation. Rising labour costs stimulated by a growing demand for qualified workforce was another important factor at work.
Over the past few years the share of reinvested profits increased steadily, but this trend reversed in 2002. The LFMI survey shows that reinvested profits averaged 54 percent in 2002, down from 66 percent in 2001. The same trend is anticipated this year. Market participants predict that reinvested profits will fall to 52 percent. This confirms earlier concerns that the abolition of a zero-tax rate on reinvested profits would undermine investment processes.
As the share of reinvested profits dwindled, companies spent less on research and development, employee training and technological innovation. Market participants think that average expenses on research and development accounted for 5.8 percent of total expenses of Lithuanian companies. No changes are expected this year.
The country’s favourable economic situation is reflected in growing personal income. Market participants think that in 2002 household income rose by 8 percent and averaged 1,866 litas per month, or 710 litas per household member. Falling unemployment, growing non-labour income and an increase in pensions were the main reasons for personal income growth. It is predicted that household income will continue to grow in 2003, albeit more slowly than last year. As the LFMI survey shows, household income will rise by 6.6 percent and amount to 1,990 litas per month, or 757 litas per household member. It is likely that forecasts of a slower income growth are related to a new procedure for personal income taxation.
After an upsurge in 2001, average employment earnings did not change essentially and totalled 1,039 litas per month at the end of 2002. Such estimates were most likely affected by a sizeable increase in earnings in 2001 and reduced profit margins in 2002. Increased competition and a falling export growth led companies to cut the prices of many goods and services. In the absence of cost-cutting possibilities prices were lowered at the expense of profits, and this may have impeded wage growth. It is predicted that average monthly net earnings will rise by 4 percent to 1,081 litas in 2003. Such forecasts can be associated with falling unemployment, growing labour demand and improving corporate indicators.
The LFMI survey shows a marked increase in household investments in 2002. According to market participants, monthly household investments soared by 31 percent and averaged 239 litas per month. Savings grew by 3.6 percent and totalled 231 litas. Daily consumption expenditures on food, clothing, utilities, transportation and communication and other needs went up by almost 6 percent.
It is interesting to note that household investments exceeded the level of savings for the first time since the launch of the LFMI survey. Income growth, rising expectations and improving possibilities to use bank loans and lease were the main reasons for investment growth. Although savings grew in absolute terms, their share in total household income slumped. This can be explained by falling interest rates on deposits and other saving instruments plus a reduced value of dollar savings caused by the depreciation of the U.S. dollar.
The growth of earnings and household income will continue to augment household savings and investments. Market participants predict that in 2003 household savings will grow more than investments – by 7.8 and 2.5 percent respectively, but their amounts will be almost equal – 249 litas and 245 litas per month respectively. The level of saving and investing will be affected by a new law on personal income tax, effective as of the beginning of 2003.
The costs of borrowing from commercial banks continued to fall in 2002, although this trend was not as prominent as in 2001. According to market participants, one-year loans in litas cost on average 7.04 percent, while those in euros cost 6.36 percent at the end of 2002. Five-year loans cost 6.86 and 6.14 percent respectively. The country’s stable financial situation, falling interest rates on international markets, intense competition and a high liquidity of the Lithuanian banking sector were the main factors of a fall in interest rates. It is predicted that the costs of borrowing from banks will continue to decrease in 2003. One-year loans will cost 6.83 percent for litas and 6.24 percent for euros; five-year loans will cost 6.67 and 6.15 percent respectively.
The country’s stable political and financial situation and falling interest rates on the world markets led to a decrease in the yield on Lithuanian government securities. It is predicted, however, that interest rates on government securities will grow in 2003. Market participants think that the yield on 3-year government securities will be 4.64 percent in the central market, i.e. higher than the interest rates recorded at the beginning of 2003. These forecasts may be explained by the expected recovery of the world’s main economies and growing indebtedness of the Lithuanian government.
Market participants predict that the U.S. dollar will cost 3.36 litas at the end of 2003.
About the survey
The survey was launched in 1997. The main goals of the survey are to provide estimates and forecasts of macroeconomic variables in Lithuania based on the opinion of market participants, to analyse factors that can influence their opinion, to compare the estimates of market participants with official statistics and data from other sources, and to offer interpretations of the most distinct differences.
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.
Fifty-two respondents participated in the eleventh survey, conducted in January 2003. The survey was funded by „Commercial Union Lietuva Gyvybës draudimas,“ „Kappa Packaging Baltic,“ „Linas,“ „Ragutis“ and „Skanska Statyba.“
