1. The Lithuanian Economy
Monthly newsletter from Swedbank’s Economic Research Department
by Nerijus Mačiulis No. 04 • 2011 06 30
Investments drive growth, external imbalances are slightly wider
In the first quarter of 2011, the biggest contribution to GDP growth came from
investments, followed by continued restocking and recovering domestic demand.
The rapid growth is partially explained by a very low base – in the first quarter of
last year, the index of gross fixed capital formation dipped to its lowest level in the
last decade. As the population dwindles, the high potential GDP growth can be
sustained by investments and increasing productivity.
Both private and public sectors increased investments in fixed tangible assets,
which in the first quarter of 2011 grew by 44% over the same period a year ago. As
we forecast in our economic outlook, the private sector significantly increased its
investments, especially in equipment, machinery, and transport vehicles. This trend
is likely to continue this year and the next.
Rising imports of investment goods and recovering domestic consumption will have
a negative impact on the foreign trade balance. As there is already a hint of new
imbalances, long-term growth should rely more on investments and exports, rather
than consumption.
Investments drive growth in both short and long Admittedly, this whopping increase follows the
term worst quarter (Q1 2010) of the last decade, when
the investments index dropped below the 2000
Gross fixed capital formation in the first quarter of level. Nevertheless, there are good reasons to
this year increased by 41.0% over the same period believe that investments will keep increasing.
last year, confirming our forecast that growth in
2011 will be driven by investments. One important reason behind the strong pickup in
investments this year is related to the upcoming
Investments (excluding inventories), 2000=100 European Basketball Championship and to the
300 leisure infrastructure projects associated with it.
Alytus Arena was opened at the beginning of this
260 year, and two more big projects – Svyturio Arena in
Klaipeda and Zalgiris Arena in Kaunas – will be
220 finished and start operating this summer.
180
Capacity utilisation in manufacturing, currently at
71%, is still below the previous peak of 75%,
140
reached in the third quarter of 2007. However,
100 manufacturers of wood products, furniture, and
wearing apparel have already reached or exceeded
60 previous highs. Even in sectors where
2005 2006 2007 2008 2009 2010 2011 manufacturing is not yet constrained by capacity
Index Index, 4 quarters mov ing av erage
utilisation, increasing exports and recovering
domestic demand will necessitate capital
Source: Statistics Lithuania
investments. Furthermore, even if capacity is not
the issue, three years of “investment abstinence”
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.

2. The Lithuanian Economy
Economic Research Department, Swedbank
Nr 04 • 2011 06 30
has rendered some manufacturers technologically Investment in tangible fixed assets, billion LTL
backwards and inefficient. 7 160
6 140
This year, Statistics Lithuania has conducted a
population and housing census that, somewhat 5
120
unexpectedly, reveals that Lithuania has only 3.05 100
4
million inhabitants (preliminary estimate). This is 80
well below the 3.25 million inhabitants at the 3
60
beginning of this year and the 3.5 million that had
2
been estimated at the beginning of the last decade. 40
As the Lithuanian population and its labour force 1 20
dwindles rapidly – due to both emigration and the 0 0
low birth rate – the economy as a whole will have to 2005 2006 2007 2008 2009 2010 2011
rely more on another factor of production – physical Others
1
capital. Acquisition of equipment, machinery , v ehicles
Construction and repairs
Index, y oy (right scale) Source: Statistics Lithuania
Over the past 15 years, average GDP growth in
Lithuania was 4.6%, third highest in EU and only
slightly lower than Estonia’s and Ireland’s 5.0%. But Over the same period, both the private and public
to sustain potential output close to 5%, Lithuania sectors increased their investments significantly.
needs to offset its population and labour force loss. Furthermore, the private sector invested twice as
Gross fixed capital formation averaged 22.5% much as the public sector. Given the lower
during the past 15 years and 27.7% in the 5 years efficiency of public sector investments, less
after EU accession. However, a big part of these crowding out by public sector and a more active
investments were in residential real estate – useful, private sector are positive developments.
but not very productive capital. In the first quarter,
gross fixed capital formation reached 22.3% of In the first quarter, the private sector was the main
GDP, above its 2009 low of 14.3% but still below contributor to the growth of investment in equipment
the post-EU accession average. and machinery – its nominal annual growth
exceeded 58%. Overall, 78% of all investments in
Investments in machinery and equipment are machinery and equipment were made by the
essential private, not the public sector. Growth in construction
and the repair of buildings and civil engineering
In the first quarter of this year, investment in structures were, on the other hand, still dominated
tangible fixed assets increased by 44.0% over the by the public sector.
same period a year ago. The acquisition of
Investment in tangible fixed assets, 1Q 2011, m LTL
equipment, machinery, and transport vehicles grew
even faster – nominal growth (at current prices) Real estate
exceeded 52%. These kinds of investments have Electricity , gas
the biggest impact on productivity and Manuf acturing
competitiveness, and thus are essential for export- Transportation and storage
driven growth. Public administration
Wholesale and retail trade
Water supply
Inf ormation and communication
Health and social work
Construction
Prof essional, scientif ic
Agriculture, f orestry
Other
0 100 200 300 400
Source: Statistics Lithuania
1
You can read more about Lithuania’s productivity in
our recent analysis: Due to the aforementioned reasons, the real estate
http://www.swedbank.lt/lt/previews/get/2417/130674583 sector invested the most (LTL 392 million) in the
9_Swedbank_Analysis_LT_Productivity_May2011.pdf first quarter, followed closely by electricity and gas,
manufacturing, and transportation and storage. The
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3. The Lithuanian Economy
Economic Research Department, Swedbank
Nr 04 • 2011 06 30
latter sector benefitted from rapidly increasing Imports, billion LTL
exports and imports, as well as by the growing 8
trade between Western Europe and CIS countries.
7
In the first quarter, manufacturers invested LTL 272 6
million, 59.5% more than in the same period last 5
year, but still 62.3% less than in 2008. Among the
biggest investors were producers of food, wood, 4
and metals. As mentioned above, manufacturers 3
are not yet constrained by production capacities;
2
however, this is bound to change in the near future.
1
Growing imports will cause external imbalances 0
2007 2008 2009 2010 2011
Capital goods Intermediate goods
The rapid growth of exports of goods and services, Consumption goods Others
which began at the start of last year, continued in Source: Statistics Lithuania
the first months of 2011. Annual growth peaked in
January, at 54.2%. Since then, it has decelerated a Capital goods make up 11%, consumption goods
bit (mainly due to the much higher comparative 21%, and intermediate goods 64% of total imports.
base), and in April exports were 22.3% higher than This import structure has changed noticeably since
a year ago. 2007, when imports of intermediate goods
Growth of exports and imports of goods and services (at
constituted 54% and capital goods 18% of total
current prices), yoy % imports. Recovering investment in fixed tangible
assets will continue to boost imports of capital
60%
goods, as most of the needed machinery,
equipment, and transport vehicles are not produced
40%
in Lithuania.
20%
The increasing import share of intermediate goods
relates to the rapid growth in manufacturing, where
0%
these intermediate goods are processed and
exported or consumed locally.
-20%
Current account and foreign trade balance, % of GDP
-40%
15%
-60% 10%
2007 2008 2009 2010 2011
5%
Exports Imports
Source: Bank of Lithuania
0%
-5% -1.1% -1.5% -2.3%
Although domestic demand was relatively weak,
imports were increasing at a pace similar to exports’ -10%
– in January, it was 56.7% and in April 23.6% -15%
higher than a year ago. Exports have already
-20%
exceeded pre-crisis records, and imports are rapidly -18.4%
approaching those levels. -25%
2006 2007 2008 2009 2010 2011
Current account balance, % of GDP
Goods and serv ices balance, % of GDP
Source: Bank of Lithuania
Although household consumption increased by
5.5% in the first quarter of this year, it still lags
behind exports. In May, retail trade continued its
strong growth, increasing by 23.8% over the same
period last year. Retail trade except transport
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4. The Lithuanian Economy
Economic Research Department, Swedbank
Nr 04 • 2011 06 30
vehicles also continued growing; in May, it was The trade deficit is nowhere near the record of –
6.5% higher than a year ago. 18.4% reached in the first quarter of 2008, but it has
worsened noticeably compared with the
The rising household consumption will inevitably corresponding quarters of 2009 and 2010. As
lead to higher imports of consumption goods, household disposable income will grow, the gap will
especially as consumers will be buying more non- widen further. A call of warning is still premature,
necessities (household appliances, information and but, as recent history shows, the trade deficit is one
communication equipment, etc). This, in turn, will of the best indicators of bubbles and imbalances
further widen the trade deficit. and should be watched closely.
Nerijus Mačiulis
Swedbank
Economic Research Department Swedbank’s monthly newsletter The Lithuanian Economy is published as a service to our
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
www.swedbank.com underlying material or its use. Readers are encouraged to base any (investment) decisions
on other material as well. Neither Swedbank nor its employees may be held responsible for
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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