In the third quarter of 2013, Lithuania’s GDP growth was the slowest in three years

According to Statistics Lithuania, real GDP increased by 2.3 per cent on an annual basis (seasonally and working-day adjusted).

In general, the growth figure did not disappoint as it was broadly in line with expectations and remained one of the highest in the European Union. However, it signaled quite clearly that maintaining growth momentum becomes more challenging. Export boom fades away as foreign demand for Lithuanian goods grows weaker. Meanwhile domestic demand remains closely related to export performance. Therefore, a sustainable consumption recovery still requires export contribution.

The most important factors behind slower economic development were weaker export and industry growth while the recovery of the domestic market was too weak to outweigh negative effect of stumbling exports. Furthermore, grain harvest in 2012 was record-high and therefore an annual decline in agriculture in the second half of 2013 was predestined.

In the second half of 2013, the main driver of the economy was domestic market as opposed to the dominance of external demand in previous years. Export growth clearly cooled down.

On the other hand, excluding refined oil products, both export and industrial production continued expanding quite firmly. Obviously, the best days for exports are coming to an end.

External demand gets firmer in Western European countries but remarkable recovery is hardly likely in this region. Eastern markets do not look promising due to weak growth in Russia, economic hardships in Belarus and Russian import bans. Furthermore, Lithuania’s export competitiveness most likely will start declining due to increase in labour and energy costs. Labour shortage problem will pose an additional challenge to growth.

On the contrary, domestic market is getting stronger. In the third quarter of 2013, retail trade growth made up 6.3 per cent on an annual basis at constant prices which was twice as fast as in the beginning of the year. Consequently, consumption and investment has already started contributing more than exports to economic growth. The improvement in employment indicators and acceleration of wage growth began to have a more marked impact on households’ spending behaviour. In addition, accommodation and catering sector was favourably affected by the EU Council Presidency in the second half of 2013.

Business investment started to grow but still remains in quite a poor condition. Capacity utilization runs at its all-time high for almost half-year, which shows urgent need for investment into equipment and machinery. However, cautious business sentiment and low borrowing appetite suggest that no huge investment breakthrough will take place in the near future. On the other hand, construction and real estate market began showing some signs of recovery. Housing prices seem to have bottomed out and started gradually rising while construction volumes are growing both in commercial and residential markets.

Source: SEB Bank