• The Lithuanian Statistical Office has published its flash estimate of Q2 09 GDP data. GDP dropped by 22.4% y/y, down from -13.6% y/y in Q1 09. This number is much worse than both we and consensus had expected.
  • The development of the Lithuania economy in the first half of 2009 has so far been below our base scenario. Thus, there is a high probability that the economy could contract by up to 20% y/y overall in 2009.
  • Overall, despite the first positive signs of a halt to the recession in global markets, the risk that the freefall trend in the Baltic economies will continue is high.

Details

The Lithuanian Statistical Office has released its flash estimate on GDP growth in Q2 09. GDP dropped by 22.4% y/y, down from -13.6% y/y in Q1 09. This number is much worse than the consensus expectation of -16.7% y/y and our expectation of -17.4% y/y.

Assessment & Outlook

Even though this is a flash estimate of GDP and we do not have a breakdown of the numbers, we think it is reasonable to assume that the continued deep contraction in GDP is broad. The Lithuanian economy continues to suffer from the nasty cocktail of a European recession, a credit crunch and the local property market bust.

However, it is not all bad news. Lithuanian monthly indicators such as industrial production and retail trade have improved in recent months. Today’s retail trade figures for June show a decline of ‘only’ 25% y/y while we had expected a decline of 27% y/y. However, as we had expected this improvement, it should have had no effect on GDP numbers and the contraction of economic activity in Q2 was even more visible than in Q1.

On the other hand, the continued stabilisation in industrial production and retail trade could mean that the contraction reached a floor in Q2, and that in Q3 we might see a very slight recovery. A more sustained export-oriented manufacturing stance is a main precondition for stronger economic performance. However, we estimate that the economy could contract by as much as 20% y/y in 2009.

We believe that a sustained recovery of the Lithuanian economy will happen only after the energy price shock at the beginning of 2010. We will then have visibility on how economy will be able to absorb this shock due to the rise in electricity prices.

The very weak GDP numbers in Lithuania could indicate that Estonia and Latvia will also release poor GDP numbers (due on 13 August and 10 August, respectively).