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Lithuania: Recovery or massive deflation?

Tue, Oct 27 2009, 13:12 GMT
by Lars Christensen, Violeta Klyviene

Danske Bank A/S

Lithuanian GDP:– Recovery or massive deflation? 

 

• Today, Lithuanian Statistics has published its flash estimate of GDP growth for Q3 09 – GDP fell by 14.3% y/y, up from a fall of 20.2% y/y in Q2. The outcome was significantly better that the consensus forecast and our estimate of a drop of 25% y/y. 
• However, we believe the quality of the numbers is highly questionable as they indicate a recovery in GDP that has not been reflected in the monthly data and as the “recovery” is due to very deep deflation in the GDP deflator – something that is not visible in the monthly inflation data measures by the consumer price index (CPI).

Details

Lithuania’s GDP fell by 14.3% y/y in Q3 09, up from minus 20.2% y/y in Q2 09. On the surface this is an indication of a rather remarkable recovery in Lithuanian GDP from Q2 to Q3. However, this is due to statistical “oddities” rather than a reflection of the real state of the Lithuanian economy. 

There are two reasons why we question the quality of the GDP numbers. First of all, the “recovery” indicated by the GDP numbers is not visible in any of the monthly data – such
as retail sales, industrial production, or exports.  

Second, and more importantly, a closer look at the data shows that the “recovery” in GDP in constant prices is due to very serious deflation in the GDP deflator, from the second to third quarter of the year. Hence, if one compares GDP growth in constant prices with  GDP growth in current prices one will notice a huge difference between the two numbers. Hence, GDP dropped by 14.3% y/y in constant prices, but in current prices it fell by 19.5% y/y! Therefore the GDP deflator has dropped by more than 5%! This compares to a rise in consumer prices (CPI – the “normal” inflation measure) of 2.7% y/y in the same period. This is a huge discrepancy between the GDP deflator and the CPI numbers that is very difficult to explain. In fact seasonally the GDP deflator dropped nearly 20% from Q2 to Q3 (see graph on the right). That surely cannot be right.  

Therefore, we do not believe that today’s GDP numbers reflect a “recovery” in the Lithuanian economy, but rather are a result of the way that GDP in current prices has been deflated. In fact, if one uses CPI to deflate GDP numbers in current prices, GDP dropped by more than 20% in Q3 (19.5%-2.5%). For a comparison of GDP deflated by the GDP deflator and the CPI deflator see the graph on the right.  

To conclude, our forecast for GDP in Q3 was too pessimistic, but it was not as wrong as
that indicated by the official GDP numbers. 

Therefore, we believe it is difficult to conclude that there are any real signs of recovery in the Lithuanian economy. That said, we remain optimistic that Lithuanian recovery will begin during 2010.

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Published on  Tue, Oct 27 2009, 13:19 GMT