Lithuania's economy growth – three times faster than the Eurozones

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After a bit slowed growth in 2014, Lithuania’s economy will come back to the rapid growth track – GDP will grow 3.6%, latest edition of EY’s “Eurozone Economic Forecast” reveals. This is a first time Lithuania’s economy is analyzed and compared with all the members of the Eurozone. Cleared costs of the currency risk with the EU markets, and euro adoption named as few of the growth factors as well as lower borrowing costs.

Despite a slowdown in 2014, due to subdued export markets and economic stagnation in Russia, GDP growth is still expected to gather pace in 2015. After expansion estimated at 2.9% in 2014, faster export increases as EU markets pick up gradually, and the impact of lower interest rates, as they move into line with the rest of the Eurozone will help to lift Lithuania’s growth to about 3.6% in 2015. In 2016-18, the expected growth will be 4.5%-5% a year.

“In the upcoming four years, Lithuania’s growth will outrun the Eurozone’s average three times. Similar trends will appear in neighboring Baltic countries, too, therefore, the Baltic region, which is only about 0.8% of the total Eurozone’s GDP, will become its growth flag-bearer. Lithuania’s accession to the Eurozone on 1 January 2015 is expected to underpin solid economic growth over the medium term, as the adoption of the euro, associated lower business costs, and rising confidence lead to stronger trade opportunities up to 5.5% this year, and 4% higher fixed investment flows”, – said Jonas Akelis, Managing Partner for the Baltic States of the professional services company EY.

According to the “Oxford Economics” Senior Economist for the Eurozone Tom Rogers, inclusion of Lithuania into the international “Eurozone Economic Forecast” enables the possibility of the country’s evaluation and direct comparison with the rest of the Eurozone. As he states, it is clear that the outlook for Lithuania remains among the best in the Eurozone.

“Although 2014 has been marked with half-closed foreign markets and the economic stagnation in Russia, 2015 is going to be rather optimistic – Lithuania’s GDP growth (3.6%) will be one of the largest in all of the Eurozone. Lithuania will leave behind not only its neighbors Latvia and Estonia, respectively with 3.4% and 2.7% growth, but Ireland, which distinguishes with a rather rapid growth of 3.2%, as well. Once-again growing export will increase the private investments that will be stimulated by the monetary easing in all of the region, too, and it will lower the external risk”, – declares T. Rogers.

Unemployment will decrease faster than in the Eurozone

As the economist states, on the four-year outlook, up to 2018, Lithuania will remain its status of the most rapid growing state in the Eurozone. And the unemployment will decrease faster than in the euro area, too – it is forecasted that it will fall around 4 percentage points to 7.5% (from the current level of 11.4%), while in the Eurozone, it remain at 10.5%, and during that four-year period it will decrease around 1 percentage point.

As Rūta Rodzko, Advisor to the Chairman of the Board of Bank of Lithuania, states, the euro will boost foreign trade as well.

“The experience of the older Eurozone members shows that the expected growth of foreign trade, after reducing the remaining economic frictions and barriers, is likely to be by 5%, or even 10%. In addition, decreased interest rates for non-financial businesses and households some time ago, should lead to yet lower interest rates, and everything is because of the elimination of foreign exchange risk. Therefore, the real, and tangible benefit of euro adoption should create the impact to Lithuania’s GDP by around 2% in the medium term (2015-22)”, – analyzes R. Rodzko.

Inflation will rise hand-in-hand with GDP

According to EY’s experts, altogether with the GDP, inflation will also rise in 2015. However, contrary to 2007, when Lithuania wanted to adopt euro for the first time, now, inflation will be more reasonable – last year, it stopped at 0.3%, while this year, prices will rise up to 1.4%. And, when the inflation will reach its peak in 2016-18, it will be just above 2%.

“The increasing inflation will restrain real wage growth, and will keep real borrowing costs low without jeopardizing export competitiveness. Also, the faster Eurozone growth from 2015 onwards will enable exports to rebound in 2016, since the export of goods and services will be up to tangible 8%, and will remain on a stable growth path for another two years. And not forgetting currency changes – the depreciation of the euro against the US dollar is going to continue, and it will help to boost Lithuania’s exports outside the Eurozone”, – states J. Akelis.

On one hand, lower public borrowing costs will encourage the Government to continue running small deficits ahead of the 2016 Parliament election (the lower borrowing costs will “help” to do that). On the other hand, while this adds to medium-term inflation risk, it ensures that public investment continues to meet rising infrastructure needs, and that domestic demand offsets any recurrent weakness in export markets.

Longer-term prospects remain promising

According to experts, although near-term prospects are held down by the external challenges and threats, longer-term prospects, however, remain promising. As EY and “Oxford Economics” evaluate, Lithuania’s small and relatively open economy responded well to the global financial crisis and the subsequent recession, with substantial “internal devaluation” helping to restore competitiveness much faster than in most other EU countries.

“Although rising labor productivity has prevented any significant decline in the unemployment rate, prospects for local manufacturing and service industries are improving steadily, which in turn will lead to rising investment in the years ahead. Assuming that external geopolitical tensions subside, this will result in good GDP growth prospects in the longer term, especially as the energy dependence upon Russian gas is reduced”, – says T. Rogers.

Communications and trade will grow the most

Experts of “Oxford Economics” forecast that the next year, as evaluated by changes in the gross value added, will be favorable to trade (growth from 1.6% in 2014 to 5.5% this year), finances and business services (growth change from 0.9% to 4.3%), and communications’ (from 0.8% - up to 4.4%) sectors. The agriculture sector will keep the last year’s pace of around 1.6%, while the industry will suffer a slowdown (from 9.5% to 4.8%). The constructions sector is going to grow a bit more rapid than last year (from 4.4% to 5.6%), and after the last year’s decline, public services are going to pick up (from -2.4% to 1.5%).

About EY’s “Eurozone Forecast”

It is the independent and comprehensive quarterly review and forecast journal of the Eurozone’s members and non-members of European Union countries. The EY Eurozone Forecast is based on the European Central Bank’s model, used in conjunction with the “Oxford Economics” Global Economic Model.

EY Eurozone Forecast December 2014 Lithuania (english) (pdf, 2mb)

EY Eurozone Forecast December 2014 Lithuania (lithuanian) (pdf, 1mb)

More information: www.ey.com/eef