A Survey of the Lithuanian Economy 2003-2004 [2]
Estimates of 2003 and forecasts for 2004 (updated)
According to the survey of market participants conducted by LFMI in January and February 2004, the Lithuanian economy grew rapidly, the financial situation of Lithuanian companies improved and the costs of borrowing declined in 2003. Economic growth was stimulated by a rising domestic market and export and brighter expectations of both companies and individuals. As the LFMI survey shows, the ongoing economic development and falling unemployment are augmenting people’s income. It is expected that the year 2004 will see a rise in earnings, a more rapid growth of household income, continued improvements in corporate indicators and rising costs of borrowing.
As the results of the LFMI survey show, the Lithuanian economy grew by 7.4 percent in 2003, as compared with 5.2 percent in 2002. The ex poste estimate of GDP growth from market participants is higher than the ex ante forecast. According to market participants, the economy will rise by 6.8 percent in 2004. Both the domestic market and exports are expected to grow at a higher rate. As the survey shows, the optimistic expectations are stimulated by the upcoming membership of the European Union from 1 May this year. Market participants unanimously agree that EU membership will have a positive impact on the Lithuanian economy and will be the strongest from 2005 through 2007.
The LFMI survey shows that in 2003 Lithuanian export grew at a similar rate as in 2002, while import growth decreased. According to market participants, export went up by 12 percent, and import rose by 11.4 percent in 2003, down from 12.2 percent in 2002. The ex poste estimate of foreign trade growth in 2003 is lower than the ex ante forecast. Lower estimates of import growth can be explained by declining investment processes after a leap in 2001 and a sliding U.S. dollar against the litas, which diminished the value of imports denominated in litas. Falling expectations of the growth of household income and daily consumption expenditure were another reason behind a lower estimate of import growth. Lower estimates of export growth are very likely related to a slower recovery of Lithuania’s major export markets than predicted before.
The survey shows that both export and import will grow at a higher rate in 2004. Again, export growth will outpace import growth. Market participants expect that export will rise by 12.9 percent and import will go up by 12.1 percent in 2004.
The updated forecasts for 2004 indicate that market participants did not change their opinion regarding the trends of the country’s foreign trade. Higher forecasts of export growth are likely the result of improving expectations of a faster recovery of the U.S. economy and the euro area and Lithuania’s forthcoming membership of the European Union. The expected rise in household income and consumption plus rising investment processes are boosting the expectations of import growth.
As the LFMI survey shows, the shadow economy did not change in 2003. Market participants report that the shadow economy accounted for 20 percent of GDP in 2003 and is expected to shrink to 19 percent in 2004. Market participants did not change the forecasts from the previous survey. A growing tax burden, tightened employment regulations, rising excise duties on tobacco products and fuel plus aggravated conditions for sole proprietorship are the factors that held back a decline in the shadow economy.
According to the survey, consumer prices grew less in 2003 than in 2002, but a higher rise is expected in 2004. Market participants think that consumer and producer prices went up by 0.8 percent each in 2003, as compared to 1.3 and 1 percent respectively in 2002. Prices were driven up by rising household income, growing domestic demand and increased excise duties. At the beginning of this year, market participants lowered the ex poste estimate of price increase in 2003, as compared to their forecast from mid-2003. Such trends can be explained by diminished expectations of the growth of household consumption, increased competition on the domestic market, rising labour productivity and a sliding U.S. dollar which lowered the prices of consumer goods and raw materials imported from dollar markets.
Shrinking unemployment, rising personal earnings, household income and domestic consumption are expected to bring about a bigger increase in prices in 2004. Market participants predict that consumer prices will grow by 2.3 percent in 2004, while producer prices will go up by 1.9 percent. Such expectations are boosted, inter alia, by the upcoming membership of the European Union and a further increase in excise duties.
The survey shows that the situation in the labour market continues to improve in line with a steady and rapid economic growth. According to market participants, the rate of unemployment was 11 percent at the end of 2003, down from 12.7 percent at the end of 2002. It is expected that unemployment will continue to decline steadily and will stand at 10 percent at the end of 2004. The survey shows that market participants are getting more optimistic in assessing the level of unemployment: the 2003 estimate and the forecast for 2004 are lower that the previous prognoses.
According to market participants, the tax burden accounted for approximately 35 percent of GDP in 2003 and will remain at the same level in 2004.
As the survey shows, personal earnings did not recover after the stagnation in 2002. Average monthly net earnings grew by a mere 0.2 percent, or 2 litas, and totalled 1,041 litas in 2003. Market participants provided a lower ex poste estimate as compared to their forecast in mid-2003. The survey shows that, despite falling unemployment, a growing demand for labour and higher corporate indicators, enterprises did not rush to raise wages.
According to the LFMI survey, earnings will pick up this year after two years of stagnation. Market participants predict that average monthly net earnings will grow by 6 percent, or 62 litas per month, and amount to 1,103 litas in 2004. As the survey shows, a continued decline in unemployment, increased competition for labour, expected improvements in corporate indicators and the prospects of EU membership will accelerate wage growth.
Last year the financial situation of Lithuanian households improved along with the country’s steady economic growth, although the improvements were not as noticeable as in 2002. Market participants think that average monthly household income rose by 2.1 percent, or 39 litas, in 2003, as compared to 8 percent in 2002, and amounted to 1,905 litas.
In 2003 market participants’ expectations of income growth changed markedly and were rather pessimistic. Such changes were most likely related to unfulfilled expectations of wage growth. Nonetheless, falling unemployment and a likely increase in non-labour and other income augmented household income last year.
The financial situation of the Lithuanian population will improve noticeably in 2004. Market participants predict that average household income will increase by 8 percent, or 153 litas, and will total 2,058 litas per month, or 807 litas per household member in 2004. A rapid growth of earnings and a further decline in unemployment will stimulate income growth.
Market participants raised slightly their forecast of household income from July 2003. Given that the 2004 forecast for wage growth was lowered, optimistic expectations regarding the growth of household income can be explained by a continuous decline in unemployment and rising non-labour and other income. Increases in pensions, social assistance benefits and other payments from the budget will also lift the level of personal income.
The LFMI survey reflects a growth in both household investments and savings. In 2003 household savings showed a sizeable growth, while the growth of household investments slumped after an impressive upsurge in 2002. Market participants think that household savings edged up by 13.9 percent (or 32 litas per month) in 2003, as compared to 3.6 percent in 2002, and totalled 236 litas per month. Household investments amounted to 293 litas per month, up by 22.6 percent (54 litas per month) from 2002. Household investments exceeded household savings for a second consecutive year.
At the beginning of 2004 LFMI survey participants provided a much higher ex poste estimate of household investments than their ex ante forecast from mid-2003. The ex poste estimate of household savings was raised negligibly. As a result of lower estimates of household income (as compared with the previous forecast), market participants reduced the estimate of daily consumption expenditures but raised the estimates of household savings and, in particular, investments. As household savings and investments increased, their share in total household income went up at the expense of shrinking daily consumption expenditures.
The growth of household savings and investments is mostly related to rising household income. Moreover, as a result of higher income expectations, the growth of investments was stimulated by increased use of banking and lease services, housing loans and life insurance. The new Law on Personal Income Tax is expected to enhance investment incentives and growth.
Growing earnings and household income will continue to augment household savings and investments. However, the expected growth rate of both savings and investments will be lower. Market participants predict that household savings will rise by 6.5 percent and equal 280 litas per month in 2004, while household investments will grow by 13.7 percent to 333 litas per month. As the LFMI survey shows, household investments will continue to grow at a hogher rate than household savings and will comprise an increasing share in total household income. Rising household income plus a slower growth of household savings and investments will increase household consumption expenditures, although their share in household income will continue to drop.
The previous two LFMI surveys reflect some changes in market participants’ expectations regarding the growth of household savings and investments in 2004. Despite lower forecasts of household income reported in January 2003 and an upsurge in investments in the last two years, market participants raised markedly the forecast of household investments. The forecasts of household savings were lowered.
As the LFMI survey shows, corporate indicators rose slightly in 2003. Market participants report that the average profit margin was 6.3 percent in 2003, up by 0.6 percentage point from 2002. The survey indicates that the average return on equity stood at 10.3 percent in 2003, a 0.6-percentage point rise from 2002. The ex poste estimates of market participants are higher than the ex ante forecasts, which were reduced in mid-2003.
Market participants predict that the average profit margin will increase to 6.5 percent, while the return on equity will reach 10.6 percent in 2004. In January 2003 the survey participants raised their ex ante forecasts. This shows that, despite fairly vague prospects of the world’s economic development, the LFMI survey experts predict improvements in the financial situation of Lithuanian companies. Such optimistic attitudes are very likely affected by the upcoming accession into the European Union and growing domestic demand. On the other hand, corporate indicators are still being driven down by a growing demand for qualified labour and rising labour costs.
The survey shows that the share of reinvested profits increased steadily in 1997-2000, but this trend reversed noticeably in 2002. According to market participants, the share of reinvested profits averaged 52 percent in 2003, down from 66 percent in 2001. Market participants did not change their forecast from the beginning of 2003. They believe that reinvested profits will slightly increase and average 54 percent of total profits in 2004.
Although the share of reinvested profits dwindled, the LFMI survey participants think that the upgrading of technologies did not stop. As the results of the survey show, expenses on research and development accounted for 5.8 percent of companies’ total expenses in 2003. Market participants are more optimistic about the prospects in 2004. They believe that the share of expenses on research and development will go up to 6.8 percent this year. This forecast is more optimistic than the prognosis from mid-2003.
According to LFMI survey experts, the yield on 3-year government bonds on the central market will be 4.18 percent at the end of 2004. The expected yield is higher than that of 3-year government bonds recorded in early January of 2003 (3.52 percent). It is likely that the expected higher yield is related to increased competition on the investment market, a slow recovery of the U.S. economy, likely changes in the European Central Bank’s policy to harness inflation and the ensuing rise in interest rates.
The costs of borrowing from commercial loans continued to fall in 2003, although this trend was not as noticeable as two years ago. According to market participants, one-year loans in litas cost on average 5.72 percent at the end of 2003, down from 7.04 percent in late 2002. Five-year loans in litas cost 5.75 percent, as compared with 6.86 percent a year before. The decline in interest rates in Lithuania is a reflection of global trends. A high liquidity of the Lithuanian banking system and strong competition among banks are other reasons behind the decline in interest rates.
According to the survey, the costs of borrowing will increase in 2004. Market participants predict that interest rates on one-year loans in litas will be 5.93 percent, and five-year loans in litas will cost 5.96 percent at the end of 2004.
LFMI survey experts predict that the share of non-bank loans (including lease and factoring) will not change and account for 18 percent of the market in 2004.
Market participants predict that the U.S. dollar will cost 2.81 litas at the end of 2004. This figure almost coincides with the exchange rate recorded on the market in late January 2004. Evidently, market participants do not expect any significant changes in the value of the U.S. dollar. It is important to note that the forecast from the previous survey was considerably lowered.
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The next survey will be conducted in the middle of 2004. It will show how market participants will have changed their forecasts for the year 2004 and what trends are expected in 2005.
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-two respondents participated in the twelfth survey. The survey was funded by „Kappa Packaging Baltic,“ „Klaipëdos kartonas,“ „Linas,“ „Santa Monica Networks“ and „SBA.“
