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The Lithuanian EconomyMonthly newsletter from Swedbank’s Economic Research Departmentby Nerijus Mačiulis, Vaiva Šečkutė No. 05 • 5 August 2011 Better expectations and lower savings behind consumption growth Retail trade in the first half of this year increased by 22.1% over the same period a year ago. Although trade in motor vehicles was the main factor behind this growth, trade in other non-necessities was also increasing more rapidly. As inflation slows and expectations gradually rise, the growth of household consumption will continue. Domestic credit is growing slowly and will contribute some, but is not likely to be a major driving force behind higher consumption. Although deposits have continued to increase, it is likely that households have also continued to reduce their savings rate, which peaked at 7.9% in 2009. The labour market remains weak – in the first quarter of 2011, the unemployment rate was 17.2%, only slightly lower than in the same period one year ago. Annual net monthly earnings in the same period increased by 1.9%, but were still below the inflation rate. More recent data from the Lithuanian Labour Exchange suggest that stronger positive developments in the labour market will become visible in the second half of this year and in 2012.Non-necessities behind retail trade growth Retail trade compared with 2005 averageIn the first half of 2011, retail trade increased by 60%22.1% over the same period a year ago. However, 50%the growth was mainly driven by sales in motor 40%vehicles, which increased by 83.7%. Retail trade 30%except motor vehicles was 6.3% higher than in thefirst half of 2010. 20% 10%Growth in retail sales of food, alcoholic beverages, 0%and tobacco remains negligible – in the first half ofthis year, it was only 0.4% higher than a year ago. -10%Moreover, in June it was 10.5% lower than the 2005 -20%average. Even though retail trade was 16.5% above -30%the 2005 average, it’s still at the same level if motor 2007 2008 2009 2010 2011vehicles are excluded. Retail trade Retail trade except transport Food Source: Statistics LithuaniaNevertheless, the pace of retail trade growth in thesecond quarter increased to more than 23% from20% in the first quarter. In the first half of this year, It is likely that increasing earnings and betterthe growth of retail sales of automotive fuels expectations – the consumer confidence indexreached 11.3%. The currency crisis in Belarus and increased to -15 in July, the highest level since Aprilrestriction on fuel sales may have reduced the 2008 – will further fuel the growth of non-consumption of smuggled fuel in Lithuania and necessities retail trade. Furthermore, the strictercontributed to the faster growth in recent months. accounting requirements for trade of food products in markets will have a positive effect on the growth Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000 E-mail: email@example.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.
The Lithuanian Economy Economic Research Department, Swedbank No. 05 • 5 August 2011of the retail trade of food products as well. The between interest rates in euros and litas maygovernment intends to introduce cashiers in all encourage households to borrow in local currency.covered markets – only food sellers are required to The ECB has already raised interest rates twice asuse cashiers now. This will have a tangible positive a measure for controlling inflation and is likely toeffect on the trade of other products, such as continue raising them in the future (although recentclothing and footwear. setback in commodities’ prices reduces theThe consumption of necessities will continue pressure to do that). In addition, Euribor may havegrowing slowly in the second half of this year, some upward pressure due to possible sovereignmainly due to high food inflation and the stagnant defaults in the euro area and large banks’ exposureincome of poorer households. In 2012, however, to sovereign debt.lower inflation, increased pensions, and higher netwage growth will contribute to higher growth in non- CPI growth and interest rates for new household loans andnecessities retail trade. deposits, % 14%Inflation to slow 12%So far, food, housing, and transport have been the 10%main drivers of inflation. The prices of food andnonalcoholic beverages were 11.1% higher in May, 8%compared with the same month a year ago. 6%However, in the last two months of the second 4%quarter, the inflation rate of other goods becamepositive as well. Prices in clothing and footwear, 2%health products, restaurants and hotels, and 0%insurance services started to increase faster in the -2%second quarter of this year. 2007 2008 2009 2010 2011 Food Housing TransportUnfortunately, the poorest households are still the Other Loans in LTL Deposits in LTL CPI growthones affected most severely by higher inflation. Source: Statistics Lithuania, Bank of Lithuania, SwedbankThree types of goods and services (food, housingand transportation) make up 51% of the averageconsumer basket in 2011, but are even more The growth of outstanding deposits decelerated inimportant for less wealthy households. May and June. New deposits with agreed maturity started to grow in March, reaching 21.4 % annualAnnual inflation may have peaked in May, when it growth in May before slowing to 11.5 % in June.reached 5%. Prices declined a bit in June and, due However, this growth in new deposits is reboundingto the stabilised prices of oil and other commodities, from 2010 lows, when the rate fell by some 50%.are expected to be more stable in the second half ofthis year. We forecast that average annual inflation Deposits from households, million LTLwill be around 4% at the end of this year and 30,000 120%somewhat lower in 2012. 100% 25,000Lending recovers slowly 80% 20,000 60%Rising inflation has implications for lending and 40%borrowing conditions as well. Saving is becoming 15,000 20%increasingly unattractive as rising inflation has notbeen followed by higher deposit interest rates. 10,000 0%Lending interest rates, particularly in litas, have 5,000 -20%been decreasing since the beginning of 2010 and -40%decreased by 1.6 percentage points during the first 0 -60%six months of this year, however, this tendency 2007 2008 2009 2010 2011should not continue as both the euro interbank Ov ernight With agreed maturityoffered rate (Euribor) and the Vilnius interbank in LTL in EUR Outstanding, y oy (rs) New, y oy (rs)offered rate (Vilibor) continue increasing. The one- Source: Bank of Lithuania, Swedbankyear Euribor interest rate rose by 67 basis points to2.18% by the end of July, while during the same The outstanding amount of loans to households hasperiod the Vilibor rate of the same maturity rose by been decreasing since September 2009. This6 basis points to 2.64%. The narrowing gap decrease was mainly caused by a decline in consumer and other credit, as the amount of 2 (4)
The Lithuanian Economy Economic Research Department, Swedbank No. 05 • 5 August 2011housing loans, which have much longer maturities income tend to be a bit less volatile. Thus, it is likelythan consumer loans, remained relatively stable. that the higher consumption was due to the lowerHowever, the pace of decline has become more savings rate, which peaked at 7.9% in 2009.moderate in 2011, as new loans started to increase Although the gap between inflation and earningsin March and reached a 9% yearly growth rate in growth has been narrowing since the first quarter ofJune. 2010, real wage growth is still negative.The outstanding amount of loans has beendecreasing as a percent of the total wage bill as Real household consumption expenditure and real wagewell. This indicator in 2011 is lower than in both bill, annual growth2009 and 2010. This trend is part of the household 16,000 30%deleveraging process; however, it was not 15,000necessary because Lithuanian households are 14,000 20%among the least indebted in the EU. 13,000 10% 12,000Outstanding loans to households, million LTL 11,000 0% 35,000 140% 10,000 -10% 30,000 120% 9,000 100% 8,000 25,000 -20% 7,000 80% 20,000 6,000 -30% 60% 2003 2004 2005 2006 2007 2008 2009 2010 2011 15,000 40% Consumption, m LTL Consumption, y oy (rs) 10,000 Real wage bill, y oy (rs) 20% Source: Statistics Lithuania, Swedbank 5,000 0% 0 -20% Weak labour market is the main drag on 2007 2008 2009 2010 2011 domestic consumption Housing loans Consumer credit & other in LTL in all currencies The labour force activity rate (sum of employed and Outstanding loans, y oy (rs) Total, % of wage bill (rs) unemployed divided by the population aged 15 and Source: Bank of Lithuania, Statistics Lithuania, Swedbank over) increased by 3.2 percentage points from its lowest point in the first quarter of 2008 to its peak atAnnual growth of outstanding loans to households 58.9% in the last quarter of 2010. However, thisstarted declining at the end of 2007 and became increase in the activity rate probably had little effectnegative in September 2009. Annual growth has on unemployment figures, which peaked at 18.3%been negative ever since and was at -4.1% in June. in the second quarter of 2010, as the number ofConsumption grows faster than earnings unemployed increased to 297,200.The decrease in credit has restricted the growth of Labour market indicatorsconsumption; however, the increasingly negative 1,800 70%real interest rates (inflation is higher than depositinterest rates) may have contributed to overall 1,600 60%household consumption growth, which reached 1,400 50%5.5% in the first quarter and probably continued at a 1,200similar pace in the second quarter of 2011. In the 1,000 40%last three months of 2010, household consumption 800expenditure increased for the first time since the 30%third quarter of 2008, reaching 1.7%. 600 20% 400However, consumption growth has outpaced the 10% 200growth of real net earnings. Despite a slight pickup(+1.9%) in nominal net earnings, average real net 0 0%earnings were still decreasing in the first quarter of 2007 2008 2009 2010 2011 Unemploy ed, thous. Employ ed, thous.2011 and were 1.4% lower than a year ago. Labour f orce activ ity (rs) Unemploy ment (rs)Average real net wages have been decreasing Source:Statistics Lithuaniasince the beginning of 2009. Admittedly, wages arejust one component of households’ disposable Unemployment decreased to 17.2% (277,600) inincome, but social transfers, pensions and capital the first three months of this year, and this decline 3 (4)
The Lithuanian Economy Economic Research Department, Swedbank No. 05 • 5 August 2011is gathering pace, as shown by the latest data on expect stronger positive developments in the labourregistered unemployment from the Lithuanian market will become visible in the second half of thisLabour Exchange. According to the exchange, year and in 2012.registered unemployment decreased from a first- Higher employment and increasing net income, notquarter average of 14.1% (303,700) to 11.1 % a lower savings rate, should be behind gradually(229,200 on August 1). increasing sustainable consumption. Let’s hopeThe number of registered unemployed fell by 30.7% that, in this respect, this economic cycle will befrom its peak in July 2010, when it reached different from previous one.330,600, and the registered unemployment ratepeaked at 15.3%.In July, the industrial confidence indicator reached Nerijus Mačiulisits highest level since November 2007 (+6), while Vaiva Šečkutėthe employment forecast in industry increased to itshighest level since the beginning of 2007. WeSwedbankEconomic Research Department Swedbank’s monthly newsletter The Lithuanian Economy is published as a service to ourSE-105 34 Stockholm customers. We believe that we have used reliable sources and methods in the preparationPhone +46-8-5859 1028 of the analyses reported in this publication. However, we cannot guarantee the accuracy firstname.lastname@example.org completeness of the report and cannot be held responsible for any error or omission in thewww.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 forLegally responsible publisher losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’sCecilia 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. 4 (4)