Lithuanian Economy, No. 3 - April 10, 2012: Demand keeps a lid on inflation, but oil will stimulate it

1. The Lithuanian Economy
Monthly newsletter from Swedbank’s Economic Research Department
by Nerijus Mačiulis, Vaiva Šečkutė No. 3 • 2012 04 10
Demand keeps a lid on inflation, but oil will stimulate it
 The rate of growth of industrial prices continued decelerating in March;
however, prices of goods sold in the local market started growing faster than
those sold in foreign markets, reflecting stronger domestic demand.
 Consumer prices grew by 1% in March, at the fastest pace in a year, and were
3.6% higher than a year ago. Higher-than-anticipated oil price growth might
contribute to higher inflation going forward even though the growth of
manufacturing prices has subsided.
 Lithuania’s term of trade deteriorated somewhat in 2011 as import prices grew
faster than export prices. This was caused by a spike of oil prices at the
beginning of this year and relatively weak demand in the main export markets.
Industrial prices grow slower domestic demand was still stagnating while exports
soared, manufacturers were able to increase prices
Annual growth in industrial prices has been
of exported goods more rapidly.
decelerating since September of 2011 and in March
of this year prices were 7.1% higher than a year
Annual changes in manufacturing prices, %
ago. In March, annual industrial price growth in the
Lithuanian market was 7.3% compared with 6.8% in 30
foreign markets.
20
Annual change in industrial prices, %
10
30
0
20
-10
10
-20
0
-30
-10 2008 2009 2010 2011 2012
Manuf acturing
Manuf acturing (excl.ref ined products)
Manuf acture of f ood products
-20
Source: Statistics Lithuania
-30
The growth of manufacturing prices has also been
2008 2009 2010 2011 2012
Lithuanian market Non-Lithuanian market declining rapidly since the middle of last year; in
Total market
March, they were 6.2% higher than a year ago.
Source: Statistics LIthuania
Furthermore, manufacturing prices, except for
refined petroleum products, were only 0.7% higher
In December, for the first time in the past two years,
in March than a year ago.
industrial price growth in the Lithuanian market
started outpacing industrial price growth in foreign Manufacturing prices of food products have not
markets. This probably reflects the weakening of been reflecting global trends. Although Swedbank
foreign demand for manufacturers' products, in food commodity index in February was 16.2% lower
contrast to the boom in domestic demand. The than a year ago, manufacturing prices of food in
opposite trend was observed in 2010 – because
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 2582237 Lina Vrubliauskienė +370 5 258 2275. Vaiva Šečkutė +370 5 258 2156.

2. The Lithuanian Economy
Economic Research Department, Swedbank
No. 3 • 2012 04 10
Lithuania were 3.7% higher in February than a year Inflation expectations
ago.
60
Consumer inflation edges upwards, but
probably only temporarily 40
Although annual inflation growth subsided at the
20
end of last year to 3.4%, it started increasing again
at the beginning of this year, reaching 3.7% in
0
February and 3.6% in March. Food, housing, and
transport have remained the main contributors to
-20
inflation this year, as in 2011; however, during the
last couple of months, prices of other goods have
been rising as well, indicating stronger demand of -40
non-necessities. 2010 2011 2012
Construction Serv ices Retail
Industry Consumers
Contribution to annual CPI growth, pp
Sources: Statistics Lithuania, Swedbank
6
Terms of trade worsened again in 2011
4
The terms of trade are a measure of a country’s
export prices in relation to its import prices. A rise in
2 this measure means that the country's terms of
trade have improved or that the country can buy
more imported goods for the same amount of
0 exported goods. A decrease in this measure means
that the country's terms of trade have deteriorated
from a year ago and the country needs to export
-2
more goods to buy the same amount of imported
2010 2011 2012 goods. High terms of trade mean higher foreign
Food Transports Housing
demand for local exports, which, in turn, increases
Others CPI growth
Source: Statistics Lithuania, Swedbank local income, and vice versa.
Prices in the sectors of restaurants and hotels, Annual change in terms of trade and import and export
prices, %
education, health, and alcoholic beverages and
tobacco started accelerating this year. Clothing and 25
footwear prices were falling during the first two 20
months of this year, but became dearer in March
15
and were the main contributors to inflation. The end
of seasonal sales and new spring collections were 10
behind 5.4% jump in clothing and footwear prices. 5
0
At the beginning of this year, higher prices of
-5
electricity, gas, and heating have contributed to
-10
somewhat higher inflation; however, this will have
only a limited effect and annual inflation is expected -15
to decline later this year. -20
2006 2007 2008 2009 2010 2011
The decreasing growth of manufacturing and Export prices Import prices
Terms of trade Income terms of trade
industrial prices suggests that consumer prices
Source: Statistics Lithuania
should subside somewhat as well. However, there
is no clear trend in inflation expectations. Even
though inflation expectations for consumers, However, sometimes the terms of trade can be
services, and construction did rise this year, retail increasing due to rapid growth in labour costs. This
trade and industry sectors' expectations decreased does not cause a big problem if growth in
a bit. Inflation will depend mostly on developments productivity keeps up the pace. From 2005 until
in global commodities markets. 2008, wages in Lithuania were increasing much
faster than productivity; thus, the increase in export
prices (and the terms of trade) was accompanied by
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3. The Lithuanian Economy
Economic Research Department, Swedbank
No. 3 • 2012 04 10
a loss of competitiveness, which hit the Lithuanian though it would stimulate domestic demand
economy exceptionally hard in 2009. somewhat and might even help to narrow the scope
The terms of trade in Lithuania deteriorated most – of smuggling.
by 5.9% – in 2009 as prices of exports fell by 16.7% Prospects for euro adoption
while prices of imports fell by only 11.5%. After
Due to global developments, inflation remains one
some improvement in 2010, Lithuania’s terms of
of the main obstacles to compliance with the
trade again worsened a bit in 2011. However, the
Maastricht criteria. Currently, we forecast average
income terms of trade1 have been increasing,
annual inflation to decline to 2.5%, but it seems
except for 2009, when a 26.6% decrease in total
increasingly unlikely as higher-than-expected oil
export value outpaced the decrease in import
prices will increase inflationary pressures in
prices. Overall, the recent deterioration in the terms
Lithuania. The relatively high unemployment levels
of trade was caused not by worsening
and weak employee negotiation powers suggest
competitiveness, but by rapidly increasing oil prices.
that wages will be increasing in line with
Lithuania’s terms of trade and the growth of its productivity; thus, domestic inflationary pressures
economy will be affected by the health of its main will be weak.
export markets, companies’ competitiveness, and Another possible obstacle to the introduction of the
the price of oil and other commodities, on which euro might be the pace of price convergence, which
Lithuania is heavily dependent. has not been very fast in Lithuania. In 2010, the
price level in Lithuania was still only 59.7% of the
Price of oil (per barrel) and wholesale petrol (per litre)
EU level, whereas it was 64.1% in Latvia and
4.9 100
68.1% in Estonia. Although prices of some products
are already the same as the EU average (e.g.,
4.7 95 footwear and clothes), prices of education and
housing were only 33.5% and 44.8% of the EU
4.5 90
average in 2010. This means that the prices of most
4.3 85 products in Lithuania will keep growing faster than
the EU average. However, this does not necessarily
4.1 80
mean that Lithuania will lose competitiveness due
3.9 75 to an appreciating real effective exchange rate –
the effect can be offset by faster productivity
3.7 70 growth.
3.5 65
Jan-11 Mar-11 May -11 Jul-11 Sep-11 Nov -11 Jan-12
Gasoline (A95) LTL Diesel LTL Brent oil, EUR (rs)
Vaiva Šečkutė
Sources:Reuters Ecowin, Orlen Lietuv a
Nerijus Mačiulis
In March prices of gasoline and diesel at gas
stations have reached record highs. The main
factor is the price of oil, which is hovering around
EUR 95 per barrel, some 10% higher than during
the previous peak in the summer of 2008. These
prices have also been influenced by the much
weaker euro exchange rate. Neither of these factors
– the price of oil or the euro exchange rate – can be
controlled by Lithuania.
However, the gasoline excise duty is some 20%
above the minimum allowed by the EU. Although
lowering the excise duty would lower the price of
gasoline by about LTL 0.30, this would create a LTL
100 million shortage in the state budget. Thus, we
do not think it is a very viable alternative, even
1
This determines the volume of imports that a country
can obtain with its export earnings; it is calculated by
dividing change in total export value by change in import
price.
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4. The Lithuanian Economy
Economic Research Department, Swedbank
No. 3 • 2012 04 10
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
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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 5 258 2275.
Vaiva Šečkutė, +370 5 258 2156.
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