A Survey of the Lithuanian Economy 2003-2004 [1]
Forecasts for 2003 (updated) and 2004
The Lithuanian Free Market Institute (LFMI) presents the twelfth survey of the Lithuanian economy which provides updated forecasts of economic variables for 2003 and forecasts for 2004 from market participants.
The survey conducted in July and August of 2003 shows that the growth of the Lithuanian economy will accelerate in 2003, household income will increase, the price of borrowing will fall but financial indicators of companies will not change. Market participants forecast that the country’s economy will maintain a similar rate of growth in 2004, household income will increase more rapidly and the financial situation of companies will improve.
As the survey shows, the Lithuanian economy is expected to grow by 6.2 percent in 2003, as compared with 5.2 percent in 2002. Market participants raised their earlier, January forecast of GDP growth by 1.1 percentage point. A rising domestic market and export growth continue to be the main factors of Lithuania’s economic development. According to market participants, the economy will maintain a similar rate of growth, 6.2 percent, in 2004. The upcoming membership of the European Union is strengthening positive expectations of market participants. The survey experts unanimously expressed positive outlooks regarding the impact of EU membership on the Lithuanian economy and expected it to be the strongest from 2005 until 2007.
Market participants think that export growth will slightly accelerate in 2003, while import growth will slow down and, unlike in 2002, export will rise faster than import. According to the survey results, export will go up by 12.3 percent and import will increase by 11.7 percent in 2003. The survey experts did not change their previous forecast of export growth, but they lowered their forecast of import growth by 1.1 percentage point. This can be explained by decelerating investment processes after an upsurge in 2001 and a sliding US dollar which reduces the litas value of imports. Lowered expectations regarding the growth of household income and daily consumption expenditures are another possible reason.
According to market participants, the growth of foreign trade will accelerate in 2004. It is expected that export will go up by 12.7 percent, while import will rise by 12.4 percent. The forecasted acceleration of export growth can be related to the expected recovery of the US economy and the euro area and Lithuania’s upcoming membership of the European Union.
As the LFMI survey shows, the shadow economy continues to account for one-fifth of Lithuania’s GDP. At the beginning of this year market participants had predicted that the shadow economy would slightly contract, but in July they raised their forecasts to the 2002 level. According to the survey experts, the shadow economy will decline to 19 percent of GDP in 2004. Given that the tax burden will not change and business and labour regulations are not likely to be reduced, the expected reduction in the shadow economy may be explained by the anticipation of a disciplinary effect of the upcoming membership of the European Union on market agents.
The survey shows that prices will continue to grow at a similar rate as in 2002. According to market participants, consumer prices will increase by 1.4 percent and producer prices will go up by 1.1 percent in 2003. It is important to note that the survey experts had predicted a much bigger increase in prices at the beginning of 2003 (2.4 and 1.7 percent respectively). It is likely that the forecasts were reduced because of lowered expectations of household income and consumption growth. A strong litas in relation to the US dollar, an intensifying domestic competition and rising labour productivity are other factors preventing a bigger price rise.
A faster growth of household income and domestic consumption is expected to push prices up more rapidly next year. According to market participants, consumer prices will grow by 2.2 percent and producer prices will rise by 1.8 percent in 2004. In addition to income growth, such forecasts are related to the anticipated effects of EU membership and further increases in excise duties.
A steady economic growth is pushing down the rate of unemployment. According to the survey experts, unemployment will fall to 11.3 percent at the end of 2003, down from 12.7 percent at the end of 2002. Rising expectations led market participants to lower their earlier forecast by 0.5 percentage point. It is expected that unemployment will continue to fall steadily until it reaches 10.5 percent at the end of 2004.
The survey shows that the tax burden has stabilised in the past few years. Market participants think that, just as in the past two years, the tax burden will comprise 36 percent of GDP in 2003 and 2004. At the beginning of this year the survey experts had expected a slight increase in the tax burden (to 37 percent) but they lowered their forecast in July, most likely due to rising expectations of GDP growth.
Employment earnings are expected to grow, albeit not very sizeably, in 2003 after the 2002 stagnation. Market participants predict that average monthly net earnings will increase by 2.2 percent and amount to 1,062 litas in 2003. It is important to note that the survey experts had been more optimistic at the beginning of the year when they had predicted a four-percent growth (to 1,081 litas). Despite rising expectations regarding a reduction of unemployment, the forecast of wage growth was reduced most probably due to lowered expectations of the growth of the profit margin. Nevertheless, falling unemployment and a growing labour demand, stimulated by intensifying competition, is forcing companies to raise salaries for qualified specialists, who represent a growing weight in the labour force.
Market participants predict that average monthly net earnings will rise much faster, by 4 percent, and total 1,130 litas in 2004. Such forecasts can be explained by a steady fall in unemployment and a rising labour demand, a higher increase in the profit margin and the prospects of EU membership.
A steady economic growth is reflected in improving financial conditions of the Lithuania people, although this year income growth is expected to be lower than in 2002. Market participants think that average household income will grow by 2.8 percent in 2003, as compared with 8 percent in 2002, and amount to 1,918 litas per month. Rising employment, falling unemployment and growing wages and pensions will be the main factors of income growth. The survey experts considerably reduced their earlier forecast from January 2003 when they had predicted a 6.6-percent growth of household income up to 1,990 litas. Given that the forecast of wage growth was lowered not so markedly and the expectations regarding a reduction in unemployment were raised, it may be concluded that lower forecasts of income growth were determined by anticipations of falling non-employment income (e.g., business income).
The survey shows that people’s financial situation will markedly improve next year. According to market participants, average household income will rise by 7.1 percent and amount to 2,055 litas in 2004. Such expectations are mostly related to the prognoses of a bigger wage growth and a continued decline in unemployment.
Both household savings and investments are expected to grow in 2003, although investment growth will markedly decelerate after an upsurge in 2002, while savings growth will pick up markedly. As the survey shows, households will allocate 256 litas per month for investments, or 7.1 percent (17 litas) more than in 2002. Savings will amount to 260 litas per month, a 12.6-percent increase (29 litas) as compared with 2002. Daily consumption expenditures on food, clothing, utilities, transportation, communication and other needs will absorb a mere 6 litas more than in 2002. Rapidly growing savings will again constitute a bigger share of household income than investments, although it should be noted that household savings and investments have been almost equal in absolute terms since 2002. In July the survey experts raised both forecasts, while lowered expectations of household income growth led them to reduce their earlier forecast of the growth of daily consumption expenditures (7.2 percent to 100 litas per month). As the updated forecasts show, households will augment their savings and investments at the expense of a reduced growth of daily consumption expenditures.
Rising household income is the main factor behind the growth of household savings and investments. As expectations grow, bank loans, lease and life insurance are being used on a wider scale and thus raising the level of investments. New provisions of personal income taxation, effective from the beginning of 2003, provide additional incentives for household investment.
It is predicted that rising earnings and income will continue to increase household savings and investments. However, as savings growth decelerates, investments will again grow faster than savings and constitute a larger share of household income. According to market participants, in 2004 households will spend 8.5 percent more on savings and 12.1 percent more on investments, 282 and 287 litas per month respectively.
As the survey shows, the profit margin and return on equity will not change in 2003, but the year 2004 will see some improvement. Market participants predict that the average profit margin will comprise 5.7 percent in 2003 and will grow to 6 percent this year. Both forecasts were lowered. This reduction can be related to a protracted recovery of Western economies, intensifying domestic competition, which is forcing companies to lower not only costs but also profits margins, and a rising demand for, and costs of, skilled labour.
According to market participants, in 2004 the average profit margin is expected to increase to 6.1 percent, while return on equity will grow to 10.4 percent. Such forecasts can be related to the expected benefits of EU membership and a rising domestic demand.
Over the past few years the share of reinvested profits increased steadily, but this trend reversed in 2002. Market participants think that the growth of reinvested profits will halt in 2003 but the year 2004 will again saw an upward trend. As the survey shows, reinvested profits will constitute 53 percent in 2003, a decline from 66 percent in 2001, but they will increase to 55 percent in 2004.
As the share of reinvested profits contracts, less is spent on research and development, employee training and technological innovation. Market participants think that average expenses on research and development will account for 5.5 percent of total corporate expenses in 2003, down from 5.8 percent in 2002 and 7.2 percent in 2001. At the beginning of this year no changes had been predicted in the share of R&D expenses, but the forecast was lowered in July. The share of R&D expenses is expected to grow to 6.2 percent in 2004 together with improvements in corporate indicators.
The country’s stable political and financial situation and falling interest rates on the global markets are pushing down the yield on government securities in Lithuania. Market participants think that the average yield on 3-year government securities in the central market will be 4.3 percent at the end of 2003, i.e. higher than the average interest rate recorded in July 2003 (3.48 percent). In January market participants had provided a higher forecast (4.67 percent) but they lowered it in July, most likely due to falling expectations of a faster recovery of the US economy and the euro area.
The survey experts do not anticipate any significant changes in 2004. They predict that the average yield on 3-year government securities will comprise 4.27 percent at the end of 2004. The anticipated decline can be related to Lithuania’s accession into the EU and a falling investment risk.
The survey shows that the costs of borrowing from commercial banks will continue to fall in 2003, although not as sizeably as in the past two years. According to market participants, one-year loans in litas will cost on average 6.07 percent, down from 7.04 percent a year before, while five-year loans in litas will cost 5.99 percent, as compared with 6.86 percent at the end of 2002. It should be noted that the survey experts lowered considerably their earlier forecasts (6.83 and 6.67 percent respectively). The main reasons behind a decline in interest rates on loans are the country’s stable financial situation, intense competition and a high liquidity of the Lithuanian banking sector. Market participants think that the costs of borrowing will continue to decrease: one-year loans will cost 5.98 percent, and five-year loans will cost 5.91 percent at the end of 2004.
The survey shows that the share of non-bank loans (including lease and factoring) will not change and comprise 18 percent of the loan market.
Market participants predict that the U.S. dollar will cost 3.16 litas at the end of 2003. This forecast is somewhat higher than the exchange rate recorded on the market at the end of July 2003. The survey experts lowered their January forecast by 0.20 litas. It is predicted that the US dollar will appreciate by the end of 2004 and cost 3.33 litas.
About the survey
Launched in 1997, the LFMI survey is aimed to provide estimates and forecasts of economic variables in Lithuania based on the opinion of market participants, to analyse factors that influence the outlooks of market participants, to compare the survey results with official statistics and data from other sources, and to offer interpretations of the most distinct differences.
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he 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.
Sixty-six respondents participated in the twelfth survey. The survey was funded by „Commercial Union Lietuva Gyvybës draudimas,“ „Constructus,“ „Kappa Packaging Baltic,“ „Linas,“ „Ragutis,“ „Santa Monica Networks“ and „Skanska Statyba“.
