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Lithuania: Slowdown has already started
Wed, May 7 2008, 15:15 GMT
by Danske Research Team
• Lithuanian growth slowed significantly to 6.4% y/y in Q1 08 from 8.0% y/y in Q4 07. We expect GDP growth to slow further - to 5% y/y in 2008 and to 4% y/y in 2009, which is linked to negative changes in the global environment, tightening credit conditions and continuing tensions in the labour market. However, we do not rule out some quarters of negative GDP growth, as seems likely in other Baltic States.
• Continuing tensions in the labour market suggest any further growth in employment is unlikely, because further wage increases could outpace productivity growth and will result in constraints on production.
• Inflation remains a key macroeconomic risk for the Lithuanian economy. The annual inflation rate rose to 11.3% y/y in March, the highest level since 1997 and new hikes are likely. Therefore, we expect annual average inflation to remain around 10% y/y in 2008 and 7% in 2009.
• Expansionary fiscal policy remains the biggest problem in economic policy and improvement is expected in the current and coming years.
• One of the biggest challenges for the Lithuanian economy will be the closure of the nuclear power plant in 2010. More expensive electricity would not only hike inflation to 11% y/y again, but may substantially slow the country's economic growth.
Published on Wed, May 7 2008, 15:17 GMT
Danske Bank
| Holmens Kanal 2-12, DK-1092 Copenhagen
http://www.danskebank.com/ | danskeresearch@danskebank.com
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