Lithuanian Economy Finally Embarks on Recovery in Q2, Brightening Outlook

Lithuania's economy pulled out of recession in the second quarter as GDP edged up 1.1% year-on-year (y/y), the first annual increase after six quarters of relentless decline, according to the Lithuanian Statistical Department. The nadir of the downturn was hit in the second quarter of 2009, after GDP recorded an unprecedented 19.5% y/y slump. The very low base level from the previous year helped to generate modest growth, but the results are still a good omen for the recovery of the crisis-shaken economy. Compared with the first quarter, the economy expanded by 2.9%, seasonally adjusted, sweeping aside fears for a steep double-dip recession that might have arisen after the GDP skidded 4% quarter-on-quarter (q/q) in the first quarter (revised from 4.1%). Upward pressure came from the buoyancy of the transport and wholesale sectors and the recovery of industry production, while the protracted decline in the construction sector continued to be the biggest negative contributor.

Overwhelmingly, the economy was supported by the upturn in exports, pushed up by the nascent recovery of Lithuania's primary European trade partners. Capacity reductions have enhanced Lithuania's product competitiveness a great deal, but a large output gap still persists. Against the background of the Eurozone's debt crisis, downward risks still persist as far as exports are concerned, although fairly robust recent results for Germany's economy have soothed concerns in this respect. Moreover, temporary factors like extreme weather conditions and the closure of a unit of the Ignalina power plant impinged on industry buoyancy in the beginning of the year, pushing the q/q GDP increase of the second quarter to some extent.

In the meantime, internal consumption remained lacklustre. In June, retail sales were in expansionary range month-on-month as they edged up 1% compared with May, seasonally adjusted, but this is hardly a consolation for the fact that they remained mired in recession in y/y terms, posting an 8.7% drop, working-day adjusted, the Statistical Department reported in another note. With unemployment skyrocketing to 18.1% in the first quarter, and as the labour market continues to have plenty of slack and wage pressures remain dormant, domestic demand will hardly be able to give the economy a boost. Meanwhile, the government remains on an extremely tight fiscal consolidation course on the road to euro adoption, with the goal set for 2014. The next round of austerity measures, intended to curb the budget deficit to 3% of GDP by 2012, down from the 7–8% expected this year, will not allow any relief from that side.

Outlook and Implications

The buoyancy of the economy signals that Lithuania has now finally embarked on a recovery path, after it passed the nadir of the recession in the second quarter of 2009. With ailing domestic demand, the economy is still running on one engine: exports remained the leading light of the economy, being pushed up by an upturn in the main European trade partners' demand. Yet external demand is recovering only very gradually, and will hardly help to kick-start the Lithuanian economy in the near term. Moreover, the rigidity of the exchange-rate regime, which harms Lithuania's competitiveness, will continue to drag down exports for some years to come, with the weakness of European demand in general—and the round of austerity measures that will ensue at home and abroad—potentially exerting additional downward pressure.