After emergency landing the shore is not visible yet
2010-01-14 Back
According to the forecasts of Swedbank analysts, the economic recession in Lithuania is to be over in the second half of 2010; however, the rates of the economy’s recovery will depend on the situation in the export markets and on the government’s ability to manage the growing debt and reduce taxes.
Although in the second half of the year the economy is expected to grow, the country’s GDP this year will balance at the level of 2009. In 2010, the unemployment rate will reach its peak; while exporters will be recovering gradually, business oriented to domestic consumption will continue to experience the burden of the crisis. In 2011, the country’s GDP is expected to grow by a modest 3 per cent. These forecasts are given in the most recent macroeconomic overview of Sweden and Baltic states prepared by Swedbank.
“If, speaking figuratively, during the first six months we have witnessed a free-fall of the country, and since autumn we are making emergency landing, but already with a parachute, then this year, most probably in spring, we will succeed in landing. True, it will be water under our feet yet other than hard ground. And here we will have two choices: to float waiting until we are carried forward by favourable streams, or row ourselves towards the shore“, - says Tomas Andrejauskas, Head of Swedbank Markets Lithuania.
Management reforms and controlled debt level would facilitate the reduction of taxes, while less rigid regulation of small- and medium-scale business would impart an additional impetus to business
Swedbank analysts stress that foundations for further development of the Lithuanian economy should be laid in 2010 and emphasise the need for structural reforms which would enable to curb the budget deficit and growing public debt. Swedbank analysts forecast that the public sector debt may exceed 40 per cent of the GDP.
“Today we can see dozens of examples all over the world when even such stable countries as Greece suffer from debt crisis. The Financial Stability Report issued in December by the European Central Bank emphasises concerns about sustainability of public finances and potential future insolvency of the European Union Member States. Lithuania must listen to these recommendations and take special actions to demonstrate our cost management ability”, - says T. Andrejauskas.
According to the Head of Swedbank Markets Lithuania, until 2011 we must control our budget and control our public debt, otherwise the Sword of Damocles of the growing public debt will cut off the hopes for smaller taxes in future. And if taxes are not reduced, it would be difficult to expect to settle the problems which we will face in 2010 – growing unemployment and low domestic consumption. Less rigid regulation of small- and medium-scale business would impart an additional impetus to business. It would encourage competition, business spirit of the public and, alongside with lower taxes, would provide conditions for the establishment of new jobs.
“The heavily criticised 2010 state budget has its positive side – the deficit financed by outside borrowing performs the function of economy encouragement. This is why it is quite understandable why the government borrows much currently. All the more that at the end of 2010, the overall debt level of Lithuania will not reach the ceiling of the Maastricht criteria – 60 per cent of the GDP. However, in addition to repayment of borrowed funds we must also pay interest, and the government still spends considerably more than collects. In such circumstances we have only three ways out: the first – further borrowing, the second – further increase of taxes, and the third – implementation of reforms, reduction of costs, balancing of the budget, repayment of debts and reduction of taxes. The first two ways lead to nowhere, while the third one is hard, albeit right. Of course, we yet may take no actions at all, just stay and wait for everything to settle of its own accord, but let’s be realists – Lithuania can’t expect in future another such economic stimulus which was made by the EU accession. This time, we have to do our homework ourselves “, - says T. Andrejauskas.
The greatest challenges: unemployment and low consumption
Bank specialists forecast that the main problems to be encountered by the country in 2010 will be the decreasing domestic consumption which will fall by another 5 per cent and growing unemployment expected to reach 16 per cent this year. Also, one should bear it in mind that the latter indicator will be somewhat reduced by emigration – if not for its impact, this statistical indicator of unemployment would be even worse.
Electricity costs which will grow almost by one fifth for enterprises will also result in increasing prices for certain basic commodities causing problems for the producers and providers of higher-end goods and services. The real after-tax salary level will further decrease by nearly 5 per cent in 2010, although its reduction pace should stabilise in the middle of the year.
“As previously, reducing consumption will be most painful for small- and medium-sized business which is mostly driven by the local market. The greatest shock will be experienced in the first quarter of the year when the first effect of higher prices of electricity and fuel are felt. Unemployment is likely to cause long-term problems for the Lithuanian economy – in Q3 of 2009, the unemployment level among young people reached 33 per cent, which increases the risk of “brain drain” and future problems for the state social insurance system, in particular if it is not reformed”, - says T. Andrejauskas.
According to the Head of Swedbank Markets Lithuania, reduced taxes would stimulate the economy of Lithuania and increase long-term competitiveness of the country.
“The only right way in which the government can stimulate business is reduction of its regulation and favourable tax environment. All other stimulation plans are either short-lived or just redecoration“, - says T. Andrejauskas.
The Head of Swedbank Markets Lithuania is of the opinion that although the first six months of the year will be hard for Lithuania, the Q2 or Q3 will bring us a relief with better economic statistics.
“Although people will feel this trend only after some time, expectations of individuals and business will start improving and thus will additionally stimulate the economy. It would be nice if the government does not stay aside from this process and provides additional stimulating measures, the main of which are lower taxes and less tight regulation”, - says T. Andrejauskas.
Euro adoption in Estonia in 2011; recovery of exports in Latvia
Swedbank analysts forecast that this year Estonia will move towards Euro adoption which is envisaged for 2011. In 2010, the Estonian economy will grow by 1.5 per cent and by 4.5 per cent in 2011.
Likewise Lithuania, Estonia will also face the problem of growing unemployment: unemployment rate this year is forecasted to reach 14 per cent and in be at 12 per cent in 2011. However, domestic consumption in 2010 will contract less than it had been expected previously (by 6 instead of 9 per cent).
“As it was already mentioned earlier, the economic cycle of Estonia is about two quarters ahead of that of Lithuania and, therefore, it is natural that Estonia, which fell into recession earlier, will get out of it quicker“, - says T. Andrejauskas.
After an 18 per cent fall of the Latvian GDP in 2009, the country’s economy is forecasted to contract by around 2-3 per cent this year and is expected to grow by 2-5 per cent in 2011. Latvian exports have already started growing, but the unemployment rate in the neighbouring country can reach as much as 23 per cent this year.
“Latvia faces a deeper recession due to its less developed industrial base; however, it is likely to develop into a real opportunity in long run. Both Lithuania and Latvia have also one similarity – both of them need reforms of the public sector because their costs are obviously excessive“, - notices Head of Swedbank Markets Lithuania.
The full version of Swedbank Economic Outlook Update can be found here.
