The Lithuanian Economy - 2011 January: Industrial production is booming, but so are producer prices

1. The Lithuanian Economy
Monthly newsletter from Swedbank’s Economic Research Department
by Nerijus Mačiulis No. 01 • 31 January 2011
Industrial production is booming, but so are producer prices
 Lithuanian industrial production went up by 6.6% in 2010. Most of the increase may
be attributed to the recovering manufacturing sector, which increased by 8.2% last
year. Although industrial production is still behind its peak, it is expected to reach
new highs this year.
 In 2010, manufacturing of paper products, chemicals, and pharmaceuticals
recovered quickly, and exceeded pre-crisis levels. Manufacturing of wearing
apparel and non-metallic mineral products, rubber and plastic products, and motor
vehicles grew at the fastest pace, but still lagged behind boom-year levels.
 The producer price index in 2010 increased by more than 10%. The main factors
behind this increase were rising prices of commodities and strong external demand.
So far, this has had little impact on consumer prices in the local market;
unfortunately, it is only a matter of time until the impact is felt.
Industrial production approaches pre-crisis After a 14.6% decline in 2009, industrial production
level recovered last year and is approaching the pre-
crisis level. Compared with 2009, industry grew by
Industrial production in emerging markets is already 6.6% in 2010, and manufacturing enjoyed a solid
some 15% above the pre-crisis levels reached in 8.2% growth.
2008. However in euro zone countries and the US it
is still around 5% below peak levels. Industrial Growth of manufacturing, excluding refined
production in Lithuania, as in the latter countries, is petroleum products, was even faster in 2010,
still below its peak level (in 2010 it was 9.8% below reaching 10%. The continued contraction of the
the level reached in 2008); however, it is supply of gas and electricity was slower (-5.7%)
approaching this level rapidly and should surpass it than in 2009 (-6.9%), and probably reflects higher
this year. energy efficiency in manufacturing and saving in
households. Furthermore, the biggest contraction in
Industrial production and manufacturing, 1Q 2005 – 4Q 2010 the supply of gas and electricity was recorded in the
(Left scale: index, 2005=100; Right scale: LTL million) second and third quarters (10% and 12.9%,
130 18,000 respectively) — the period when one of the largest
125 16,000 factories in the chemical industry stopped most of
120 14,000 its operations.
12,000
115 The growth of industry in the last quarter of 2010
10,000
110 accelerated to 16.5% after 7.8% and 4.6%
8,000
105
increases in the third and fourth quarters,
6,000
respectively. Manufacturing accelerated even faster
100 4,000
and in the last quarter was 21% higher than a year
95 2,000 ago. The fourth-quarter growth of manufacturing,
90 0 excluding refined petroleum products, was a bit
2005 2006 2007 2008 2009 2010 more modest and was 19.9% higher than a year
Ref ined petroleum products
Electricity , gas, steam and air conditioning supply ago.
Mining and quarry ing
Manuf acturing, except petroleum products
Manuf acturing, index (ls) Manufacturing growth to continue
Industry except construction, index (ls)
Source: Statistics Lithuania The performance of manufacturing in 2010,
although strong, was uneven. Production of paper
and paper products, pharmaceuticals, and chemical
Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000
E-mail: ek.sekr@swedbank.com www.swedbank.com
Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720
Nerijus Mačiulis + 370 5 258 2237. Lina Vrubliauskienė +370 5 258 2275. Ieva Vyšniauskaitė +370 5 258 2156.

2. The Lithuanian Economy
Economic Research Department, Swedbank
Nr 01 • 31 January 2011
products exceeded or came close to previous Manufacturing sectors, 1Q 2005 – 3Q 2010
highs. Some sectors, however, are still well below (Index, annual change, %)
their best years – including manufactures of motor 160
vehicles, textiles, electrical equipment, and non-
140
metallic mineral products. The speed of decline in
2009 and recovery in 2010 depended on the 120
orientation of the producers: in general, export-
oriented sectors overperformed those that are 100
dependent on domestic demand.
80
Leading manufacturing sectors, 1Q 2005 – 3Q 2010
60
(Index, 2005=100)
260 40
2005 2006 2007 2008 2009 2010
240
Rubber and plastic products
220 Electrical equipment
Furniture
200 Food products
Source: Statistics Lithuania Wearing apparel
180
160
Lithuania does not (and should not) aspire to be
140
recognized among leading industrial countries, but
120
in a medium term growth of the economy will have
100
to rely on manufacturing, which is expected to
80 continue double digit growth in the first half of 2011.
2005 2006 2007 2008 2009 2010
Paper and paper products
Producer prices reflect global
Chemical products developments
Pharmaceuticals
Source: Statistics Lithuania Machinery and equipment n.e.c. After a16% spike in prices of industrial production in
December, average annual producer price inflation
Other manufacturing sectors, such as rubber and in 2010 reached 10.3%. This is a significant
plastic products, electrical equipment, wood rebound after the 13.3% decline recorded in 2009.
products, furniture, and wearing apparel, have Prices of oil, gas, and other commodities in
grown at paces similar or exceeding those of the international markets are the main culprits, but a
boom years; however, due to a steep decline in strong pickup in demand for manufacturing
2009, they are still below their peak levels. For production also contributed to price increases. This
example, in the first three quarters of last year, is reflected in the differences in product prices for
manufacturing of transport vehicles, trailers, and Lithuanian and foreign consumers. The average
semitrailers increased by more than 80% compared annual increase in prices of industrial production
with the same period of 2009. However, the jump is sold in the Lithuanian market edged up by 4.1%,
mainly due to a very small comparative base. whereas prices of production sold in foreign
markets increased by 16.9%.
One of the few sectors that continued to decline last
year was manufacturing of food products. Except Producer prices of food products sold in Lithuania
for manufacturing of refined petroleum products, declined by 0.3% (after declining by 4.6% in 2009),
which makes up one-third of total manufacturing whereas prices of food products sold in foreign
(but depends on a single company), the food sector markets rose by 12.3%. Probably, this partly
is still the largest and makes up one-sixth of total reflects the different structure of products sold in
manufacturing. The growth of the latter sector was Lithuania and abroad (higher added value), but also
muted due to weak domestic demand, on which it suggest that some of the price increases for local
heavily relies. However, producers of food and consumers were postponed due to very weak
beverages are slowly discovering new export domestic demand. The same tendency is noticed in
markets and becoming less dependent on local other sectors; for example, last year prices of
consumers. Sometime in the not-too-distant future, rubber and plastic products in the local market
domestic demand for consumer staples will pick up declined by 3.4% but went up by 5.7% in foreign
and provide a strong boost for the manufacturing markets.
sector.
A different tendency is noticed in producer prices of
pharmaceuticals. Although these prices were
increasing in both 2009 and 2010 (8.4% and 11.2%,
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3. The Lithuanian Economy
Economic Research Department, Swedbank
Nr 01 • 31 January 2011
respectively), the burden was heavier for local than electrical and equipment, and motor vehicles,
foreign consumers. Producer prices of producer prices were still declining in 2010. This
pharmaceutical products and preparations in the reflects a positive consequence of increased
Lithuanian market went up by 14.4% last year, productivity through lower labour costs.
compared with only a 5.5% price increase of
products sold in foreign markets. Rising Manufacturing and consumer prices, Jan 2005 – Dec 2010
pharmaceutical prices during the recession (Annual change, %)
confirms the theory that this sector is immune to (or 20
even enjoys) downturns. However the reasons
15
behind the differences in producer prices of
pharmaceuticals sold in Lithuania and abroad may 10
be a little more subtle. Since 2010, it has been
5
forbidden for doctors to indicate a specific brand of
medicine on prescriptions – only the active 0
chemical within it can be stated. This may have
-5
caused some consumers of pharmaceuticals to
switch to cheaper generics (which are more often -10
produced in Lithuania) and have created a
favourable environment for producers to increase -15
2005 2006 2007 2008 2009 2010
their prices.
Manuf acturing prices
Consumer prices, lagged 2 quarters
Prices of industrial production, Jan 2005 – Dec 2010 Source:Statistics Lithuania and Swedbank calculations
(Annual change, %)
40
The strong pickup in producer prices poses two
30 main threats. First, relatively more expensive
production is less competitive abroad and will cause
20 a slowdown in exports and manufacturing itself.
10
Even if competitiveness has not suffered so far,
sectors operating at close to full capacity and
0 experiencing some shortages of specific skilled
labour may start raising wages, which will place
-10
more upward pressure on prices and dent
-20 competitiveness. Second, higher producer prices in
the Lithuanian market are already starting to be
-30
reflected in rising consumer prices. This does not
2005 2006 2007 2008 2009 2010
Total market
bode well for lower-income households, which have
Lithuanian market not yet recovered from the hit on their disposable
Source: Statistics Lithuania Non Lithuanian market income.
Average annual inflation of manufacturing prices in
2010 was 11.3%, after a 15.8% decline in 2009. Not Nerijus Mačiulis
surprisingly, an above-average price increase was
recorded in manufacturing of refined petroleum
products, chemicals and chemical products, and
pharmaceuticals. However, in many sectors, such
as the manufacture of wearing apparel, machinery,
Swedbank
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SE-105 34 Stockholm customers. We believe that we have used reliable sources and methods in the preparation
Phone +46-8-5859 1028 of the analyses reported in this publication. However, we cannot guarantee the accuracy or
ek.sekr@swedbank.com completeness of the report and cannot be held responsible for any error or omission in the
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Legally responsible publisher
losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’s
Cecilia Hermansson, +46-8-5859 7720.
monthly newsletter The Lithuanian Economy.
Nerijus Mačiulis, +370 5 2582237.
Lina Vrubliauskienė, +370 5 268 4275.
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