Lithuania: Lithuania Outlook for 2013-17

The country (Lithuania) is situated in Eastern Europe, bordering the Baltic Sea, between Latvia and Russia. it has borders with Belarus for 660km, Latvia for 576km, Poland for 103km and Russia for 273km.
Land in Lithuania is lowland, a lot of scattered small lakes, fertile soil.The climate is transitional, between maritime and continental; wet, moderate winters and summers.
(official) 82%, Russian 8%, Polish 5.6%, other and unspecified 4.4%

OVERVIEW

Owing mainly to the slow increase outlook for western Europe, The Economist Intelligence Unit forecasts annual average increase of just 3.3% in 2013-17. Inflation has fallen substantially in 2013, reflecting lower food and import prices. Price increase will accelerate modestly from 2014. The current-account deficit narrowed in 2012, but will widen gradually over the estimate period as domestic request improves.

Political outlook

We presently expect the government to meet its target of euro zone accession in 2015, owing largely to the sharp drop in inflation. This should allow Lithuania to meet all of the Maastricht Criteria for euro zone entry.

Economic forecast

Real GDP grew by 3.8% year on year in the second quarter of 2013, up from 3.5% in the previous quarter, driven largely by manufacturing and domestic consumption. We forecast growth of 2.9% in 2013, rising to an average of 3.4% in 2014-17.

Outlook for 2013-17

• A four-party coalition centred on the Social Democratic Party and the Labour Party has 87 seats out of 141 in the Seimas (parliament).
• Although the parties in the government won the 2012 election on a mildly anti-austerity platform, fiscal policy will remain constrained by a desire to join the euro.
• The budget deficit fell to 3.3% of GDP in 2012, down from 5.5% in 2011. The government will maintain fiscal discipline and we estimate that the deficit will fall to 2.1% of GDP in 2013 and 1.2% by 2017.
• Real GDP increase slowed in the initial half of 2013, due to continued weakness in the euro zone. We expect the economy to expand by 2.9% this year, rising to an average 3.4% in 2014-17 as external request recovers.
• We presently expect Lithuania to join the euro zone in 2015, rather than 2016. The key risk is inflation, although a fall in prices through 2013 should ensure that Lithuania meets the Maastricht Criteria at the same time as it applies in 2014.
• The current-account deficit will widen during the estimate period owing to an increase in the goods shortfall. At an average of 2.3% in 2014-17, it will remain well below the 2006-08 level.

Review

• The economy grew by 3.7% year on year in the second quarter, driven largely by manufacturing and domestic consumption.
• The manufacturing component was significantly boosted by one-off base effects from the Orlen Lietuva refinery, which was closed in May 2012 for maintenance and is estimated to account for 20-25% of total industrial output.
• The unemployment rate fell to 10.1% in July, the lowest level since October 2012. However, this continues to be driven to a large extent by emigration, while the dependency ratio has risen sharply since 2008.
• Net emigration fell to 726 in July, the lowest level since 2003, indicating that the rate of Lithuania\'s demographic decline is slowing.
• Industrial production grew by 3% year on year in July, up from 0.8% in June, driven by manufacturing output.
• Merchandise exports grew by 6.6% year on year in June, compared with a 0.3% increase in imports as domestic request remained weak.
• Consumer price inflation fell to 0.5% year on year in August, a 40-month low, driven by a fall in food, clothing, energy and transportation prices.