Roundup: Growth of Lithuanian economy to slow down this year

Lithuanian central bank revised downwards the country's gross domestic product (GDP) forecast on Friday, mostly due to the worse outlook for the Russian economy which poses essential challenges to Lithuanian exporters.

The Bank of Lithuania expects Lithuanian economy to grow by 2.7 percent in 2015, to compare with 3.1 percent projected in last December.

"Although the development of domestic demand in the country is sustainable enough, internal growth alone is not sufficient to maintain the previously projected rates of economic development," Raimondas Kuodis, Deputy Chairman of the Board of the Bank of Lithuania, was quoted as saying in the bank's statement.

The significantly deteriorating situation in Russia, determined by persisting geopolitical tensions and falling oil prices, will worsen the performance of Lithuanian exporters, the bank stated.

Russia's share amounts to one fifth of Lithuania's total exports, including re-exported goods.

Nevertheless, due to the improved outlook for Lithuania's major foreign trade partners - the euro area and other countries, GDP growth in Lithuania is projected to accelerate to 3.5 percent in 2016.

Vitas Vasiliauskas, the Chairman of the Board at Lithuanian central bank, said other European countries are being affected as well by Russia's trade restrictions and worsening economic situation.

"Search for the new export markets could offset the negative effect from deteriorating Russia's market," Vasiliauskas said in an interview with national broadcaster LRT.

Domestic demand, which includes investment and household consumption, will remain the main driver for the development of the domestic economy, the central bank expects. Due to low oil prices, the general price level is projected to fall by an average 0.3 percent this year. The previous projection by the central bank for price growth was 0.9 percent.

Average wages and salaries are projected to rise by 4.9 per cent this and next year.

"With growth in wages and salaries, despite the general price level not rising, the real purchasing power of the population is likely to increase; this would further increase domestic consumption, which is currently a major pillar for the domestic economy," said Gediminas Simkus, Director of the Economics and Financial Stability Service at the Bank of Lithuania.

Lithuanian analysts warn about persisting external uncertainty which undermines the Baltic country's growth momentum.

"Growth is still being projected, but we do not know how things will be in half a year," Vytautas Zukauskas, a senior expert at the Lithuanian Free Market Institute (LFMI), was quoted as saying by BNS news agency.

"The political situation in the East is quite threatening and we are exporting a lot to that area," he added.

He suggested Lithuanian authorities should drop plans to increase minimum monthly salary when the outlook for the Lithuanian economy is unclear.

Rimantas Rudzkis, senior researcher at Vilnius University's Institute of Mathematics and Informatics, suggested in an interview with BNS that Lithuanian GDP growth could be zero percent this year, however, he stressed it is difficult to predict what share of Russian market Lithuania is going to lose.

According to Rudzkis, there are a few driving factors, such as low global commodity prices and the European Central Bank's policies, nevertheless, due to geopolitical situation, Lithuania is losing a significant share of important market in the East.

Swedbank, one of the leading commercial banks in Lithuania, revised in January Lithuania's GDP growth forecast by a full percentage point to 2.3 percent in 2015, from 3.3 percent in November last year.

SEB Bank cut its GDP growth forecast for 2015 to 2.6 percent, from 3.2 percent, in December, while DNB Bank expects the economy to expand by 2.6 percent this year.

The Lithuanian Finance Ministry projects 3.4 percent GDP growth for this year. Nevertheless, Rimantas Sadzius, Lithuanian finance minister, suggested in last December that Lithuanian economy would grow at 2.7-2.9 percent in 2015, lower than official projections.

The European Commission last month lowered its forecast of Lithuania's GDP growth this year to 3 percent, from 3.1 percent projected last November. Endit