A Survey of the Lithuanian Economy 2002-2003
Forecasts for 2002 (updated) and 2003
The Lithuanian Free Market Institute (LFMI) presents the tenth survey of the Lithuanian economy providing market participants’ forecasts for 2002 (updated) and 2003.
The survey of market participants, conducted in July-August 2002, shows the Lithuanian economy rapidly growing. People’s income is increasing. The financial situation of enterprises is stable. The economic growth is stimulated by the rising domestic market and export growth, although the latter is declining. Similar trends will persist in 2003. It is expected that household income will continue to rise and corporate indicators will improve markedly.
In mid-2002 market participants raised the forecast of GDP growth they made at the beginning of the year. It is predicted that Lithuania’s GDP will grow by 4.7 percent in 2002, as compared with 4.2 percent in 2001, and at a similar rate, 4.6 percent, in 2003. As in the previous surveys, market participants provided lower forecasts than the Ministry of Finance (5.1 percent for 2002), but they are more optimistic than most international institutions.
According to market participants, the growth of Lithuania’s foreign trade is decelerating. It is predicted that this year export growth will fall markedly, but it will still be higher than import growth, 12.7 and 12.1 percent respectively. In 2003 foreign trade will grow at a similar rate as this year. The rates of import and export growth are expected to become similar, about 13 percent.
As the LFMI survey shows, the shadow economy, which has contracted markedly over the past few years, will expand again, but these trends will not persist long. Market participants think that the shadow sector will account for 21 percent of GDP in 2002 and will contract slightly, to 20 percent, in 2003.
Market participants think that both consumer and producer prices will grow less than last year but in 2003 their growth will accelerate again and reach the 2001 level. It is predicted that consumer prices will rise by 2.1 percent in 2002 (up from 2.6 percent in 2001) and 2.5 percent in 2003. Producer prices are expected to increase by 1.2 percent in 2002 and 1.8 percent in 2003. A lower price rise this year is related to the appreciation of litas against the US dollar and a growing competition on the domestic market. Yet, growing household consumption will continue to drive prices up. Other important factors that have affected the level of prices are rising monopoly (telecommunication services) and state-regulated prices (electricity and heating) as well as tax hikes (excise duties).
Market participants think that a steady economic growth is having a positive though not very profound effect on the labour market. In 2002 unemployment is expected to fall at a similar rate as last year and stand at 13.4 percent at the end of the year. As the LFMI survey shows, a steady economic development and rising corporate indicators and expectations will provide conditions for unemployment to slump more rapidly in 2003, down to 12.7 percent at the end of 2003.
The tax burden, which contracted markedly in 2001, will remain the same and comprise about 36.5 percent of GDP in 2002. Next year, however, it will grow again to exceed the level of the last two years (over 37 percent). It is likely that tax hikes adopted in 2002 are being outweighed by a rapid GDP growth. It can be concluded that the tax burden is shrinking due to growing income from sources that are either tax-exempt or taxed at lower rates. Next year the tax burden will be affected mostly because of an increase in personal income tax rates.
The LFMI survey does not show any marked changes in the financial situation of Lithuanian enterprises. As market participants reported, this year the profit margin will stand at a similar level, 6.2 percent, as in 2001, but next year this indicator will rise slightly, up to 6.4 percent. Return on equity will continue to grow steadily, by 10.8 percent in 2002 and 11.3 percent in 2003 respectively.
In the past few years companies kept augmenting reinvestments (up to 66 percent of profits in 2001). This year, however, the share of reinvested profits is expected to drop markedly, down to 51 percent. As the LFMI survey shows, reinvestments will not grow next year either. This confirms the predictions that the abolition of a zero-tax rate on reinvested profits starting from 2002 would hold back investment processes. As investments fall, companies spend less on market research and innovation, about 6 percent of total corporate expenses.
The country’s improving economic situation is reflected in people’s growing income. According to market participants, average household income will grow by 8.3 percent up to 1,870 litas per month in 2002. The growth of income is due to rising employment, growing non-wage income and pensions. It is predicted that in 2003 household income will increase less (4.4 percent) and stand at 1,952 litas per month at the end of the year. Such forecasts can be related to the new rules of personal income taxation, coming into effect in 2003.
Market participants think that average net earnings, which grew sizeably last year, will not change and total 1,036 litas per month at the end of 2002. However, they are expected to increase to 1,078 litas at the end of 2003. Earnings will grow due to falling unemployment, a growing labour demand and a rapidly improving financial situation in the business sector. Just as in previous surveys, market participants provided much higher forecasts of household monetary income and earnings than the official statistics. This difference shows that a large portion of income is not reported.
The survey shows that the level of household savings is falling. According to market participants, households will save on average 197 litas per month in 2002, or 12 percent (26 litas) less than last year. This can be attributed to falling interest rates on deposits and other saving instruments. Yet, as households’ financial situation and expectations increase, more will be spend on current consumption and consumer durables. It is predicted that household investments will amount to 190 litas per month, or 4 percent (7 litas) more than in 2001. Next year growing earnings and household income as well as falling unemployment will stimulate an increase in both household savings and investments, by five and eight percent respectively. The level of household savings and investments is likely to be affected by new rules of personal income taxation, to be enforced as of 2003.
The country’s stable financial situation as well as a strong competition and a high liquidity of the banking sector are likely to cause a continued reduction in interest rates on loans, although this trend is not expected to be as strong as last year. Market participants think that at the end of 2002 one-year loans in litas will cost 7.64 percent, while those in euros, 6.93 percent. The interest rates on five-year loans will stand at 7.38 and 6.68 percent respectively. The interests rates are expected to grow slightly in 2003.
As the survey shows, the yield on government securities will continue to fall. At the end of 2002 interest rates on three-year government securities will average 5.23 percent, but next year they will slightly grow, up to 5.402 percent.
About the survey
The main goals of the Survey of the Lithuanian Economy, launched by LFMI in 1997, 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.
Forty-eight respondents participated in the latest survey, conducted in July-August 2002. The survey was funded by „GlaxoSmithKline,“ „Lietuvos telekomas,“ „Linas,“ „Ragutis“ and „Skanska Statyba.“
