The Lithuanian Economy - No 5, August 5, 2011: Better expectations and lower savings behind consumption growth

1. The Lithuanian Economy
Monthly newsletter from Swedbank’s Economic Research Department
by Nerijus Mačiulis, Vaiva Šečkutė No. 05 • 5 August 2011
Better expectations and lower savings behind
consumption growth
 Retail trade in the first half of this year increased by 22.1% over the same
period a year ago. Although trade in motor vehicles was the main factor
behind this growth, trade in other non-necessities was also increasing more
rapidly. As inflation slows and expectations gradually rise, the growth of
household consumption will continue.
 Domestic credit is growing slowly and will contribute some, but is not likely to
be a major driving force behind higher consumption. Although deposits have
continued to increase, it is likely that households have also continued to
reduce their savings rate, which peaked at 7.9% in 2009.
 The labour market remains weak – in the first quarter of 2011, the
unemployment rate was 17.2%, only slightly lower than in the same period
one year ago. Annual net monthly earnings in the same period increased by
1.9%, but were still below the inflation rate. More recent data from the
Lithuanian Labour Exchange suggest that stronger positive developments in
the labour market will become visible in the second half of this year and in
2012.
Non-necessities behind retail trade growth Retail trade compared with 2005 average
In the first half of 2011, retail trade increased by 60%
22.1% over the same period a year ago. However, 50%
the growth was mainly driven by sales in motor 40%
vehicles, which increased by 83.7%. Retail trade
30%
except motor vehicles was 6.3% higher than in the
first half of 2010. 20%
10%
Growth in retail sales of food, alcoholic beverages,
0%
and tobacco remains negligible – in the first half of
this year, it was only 0.4% higher than a year ago. -10%
Moreover, in June it was 10.5% lower than the 2005 -20%
average. Even though retail trade was 16.5% above -30%
the 2005 average, it’s still at the same level if motor 2007 2008 2009 2010 2011
vehicles are excluded. Retail trade Retail trade except transport Food
Source: Statistics Lithuania
Nevertheless, the pace of retail trade growth in the
second quarter increased to more than 23% from
20% in the first quarter. In the first half of this year, It is likely that increasing earnings and better
the growth of retail sales of automotive fuels expectations – the consumer confidence index
reached 11.3%. The currency crisis in Belarus and increased to -15 in July, the highest level since April
restriction on fuel sales may have reduced the 2008 – will further fuel the growth of non-
consumption of smuggled fuel in Lithuania and necessities retail trade. Furthermore, the stricter
contributed to the faster growth in recent months. accounting requirements for trade of food products
in markets will have a positive effect on the growth
Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000
E-mail: ek.sekr@swedbank.com www.swedbank.com
Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720.
Nerijus Mačiulis +370 5 2582237 Lina Vrubliauskienė +370 5 258 2275. Vaiva Šečkutė +370 5 258 2156.

2. The Lithuanian Economy
Economic Research Department, Swedbank
No. 05 • 5 August 2011
of the retail trade of food products as well. The between interest rates in euros and litas may
government intends to introduce cashiers in all encourage households to borrow in local currency.
covered markets – only food sellers are required to
The ECB has already raised interest rates twice as
use cashiers now. This will have a tangible positive
a measure for controlling inflation and is likely to
effect on the trade of other products, such as
continue raising them in the future (although recent
clothing and footwear.
setback in commodities’ prices reduces the
The consumption of necessities will continue pressure to do that). In addition, Euribor may have
growing slowly in the second half of this year, some upward pressure due to possible sovereign
mainly due to high food inflation and the stagnant defaults in the euro area and large banks’ exposure
income of poorer households. In 2012, however, to sovereign debt.
lower inflation, increased pensions, and higher net
wage growth will contribute to higher growth in non- CPI growth and interest rates for new household loans and
necessities retail trade. deposits, %
14%
Inflation to slow
12%
So far, food, housing, and transport have been the
10%
main drivers of inflation. The prices of food and
nonalcoholic beverages were 11.1% higher in May, 8%
compared with the same month a year ago. 6%
However, in the last two months of the second
4%
quarter, the inflation rate of other goods became
positive as well. Prices in clothing and footwear, 2%
health products, restaurants and hotels, and 0%
insurance services started to increase faster in the -2%
second quarter of this year. 2007 2008 2009 2010 2011
Food Housing Transport
Unfortunately, the poorest households are still the Other Loans in LTL Deposits in LTL
CPI growth
ones affected most severely by higher inflation.
Source: Statistics Lithuania, Bank of Lithuania, Swedbank
Three types of goods and services (food, housing
and transportation) make up 51% of the average
consumer basket in 2011, but are even more The growth of outstanding deposits decelerated in
important for less wealthy households. May and June. New deposits with agreed maturity
started to grow in March, reaching 21.4 % annual
Annual inflation may have peaked in May, when it growth in May before slowing to 11.5 % in June.
reached 5%. Prices declined a bit in June and, due However, this growth in new deposits is rebounding
to the stabilised prices of oil and other commodities, from 2010 lows, when the rate fell by some 50%.
are expected to be more stable in the second half of
this year. We forecast that average annual inflation Deposits from households, million LTL
will be around 4% at the end of this year and 30,000 120%
somewhat lower in 2012. 100%
25,000
Lending recovers slowly 80%
20,000 60%
Rising inflation has implications for lending and
40%
borrowing conditions as well. Saving is becoming 15,000
20%
increasingly unattractive as rising inflation has not
been followed by higher deposit interest rates. 10,000 0%
Lending interest rates, particularly in litas, have 5,000
-20%
been decreasing since the beginning of 2010 and -40%
decreased by 1.6 percentage points during the first 0 -60%
six months of this year, however, this tendency 2007 2008 2009 2010 2011
should not continue as both the euro interbank Ov ernight With agreed maturity
offered rate (Euribor) and the Vilnius interbank in LTL in EUR
Outstanding, y oy (rs) New, y oy (rs)
offered rate (Vilibor) continue increasing. The one- Source: Bank of Lithuania, Swedbank
year Euribor interest rate rose by 67 basis points to
2.18% by the end of July, while during the same
The outstanding amount of loans to households has
period the Vilibor rate of the same maturity rose by
been decreasing since September 2009. This
6 basis points to 2.64%. The narrowing gap
decrease was mainly caused by a decline in
consumer and other credit, as the amount of
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3. The Lithuanian Economy
Economic Research Department, Swedbank
No. 05 • 5 August 2011
housing loans, which have much longer maturities income tend to be a bit less volatile. Thus, it is likely
than consumer loans, remained relatively stable. that the higher consumption was due to the lower
However, the pace of decline has become more savings rate, which peaked at 7.9% in 2009.
moderate in 2011, as new loans started to increase
Although the gap between inflation and earnings
in March and reached a 9% yearly growth rate in
growth has been narrowing since the first quarter of
June.
2010, real wage growth is still negative.
The outstanding amount of loans has been
decreasing as a percent of the total wage bill as Real household consumption expenditure and real wage
well. This indicator in 2011 is lower than in both bill, annual growth
2009 and 2010. This trend is part of the household 16,000 30%
deleveraging process; however, it was not 15,000
necessary because Lithuanian households are 14,000
20%
among the least indebted in the EU. 13,000
10%
12,000
Outstanding loans to households, million LTL
11,000 0%
35,000 140% 10,000
-10%
30,000 120% 9,000
100% 8,000
25,000 -20%
7,000
80%
20,000 6,000 -30%
60%
2003 2004 2005 2006 2007 2008 2009 2010 2011
15,000
40%
Consumption, m LTL Consumption, y oy (rs)
10,000 Real wage bill, y oy (rs)
20%
Source: Statistics Lithuania, Swedbank
5,000 0%
0 -20% Weak labour market is the main drag on
2007 2008 2009 2010 2011 domestic consumption
Housing loans Consumer credit & other
in LTL in all currencies The labour force activity rate (sum of employed and
Outstanding loans, y oy (rs) Total, % of wage bill (rs) unemployed divided by the population aged 15 and
Source: Bank of Lithuania, Statistics Lithuania, Swedbank
over) increased by 3.2 percentage points from its
lowest point in the first quarter of 2008 to its peak at
Annual growth of outstanding loans to households 58.9% in the last quarter of 2010. However, this
started declining at the end of 2007 and became increase in the activity rate probably had little effect
negative in September 2009. Annual growth has on unemployment figures, which peaked at 18.3%
been negative ever since and was at -4.1% in June. in the second quarter of 2010, as the number of
Consumption grows faster than earnings unemployed increased to 297,200.
The decrease in credit has restricted the growth of Labour market indicators
consumption; however, the increasingly negative
1,800 70%
real interest rates (inflation is higher than deposit
interest rates) may have contributed to overall 1,600
60%
household consumption growth, which reached 1,400
50%
5.5% in the first quarter and probably continued at a 1,200
similar pace in the second quarter of 2011. In the 1,000 40%
last three months of 2010, household consumption
800
expenditure increased for the first time since the 30%
third quarter of 2008, reaching 1.7%. 600
20%
400
However, consumption growth has outpaced the 10%
200
growth of real net earnings. Despite a slight pickup
(+1.9%) in nominal net earnings, average real net 0 0%
earnings were still decreasing in the first quarter of 2007 2008 2009 2010 2011
Unemploy ed, thous. Employ ed, thous.
2011 and were 1.4% lower than a year ago. Labour f orce activ ity (rs) Unemploy ment (rs)
Average real net wages have been decreasing Source:Statistics Lithuania
since the beginning of 2009. Admittedly, wages are
just one component of households’ disposable Unemployment decreased to 17.2% (277,600) in
income, but social transfers, pensions and capital the first three months of this year, and this decline
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4. The Lithuanian Economy
Economic Research Department, Swedbank
No. 05 • 5 August 2011
is gathering pace, as shown by the latest data on expect stronger positive developments in the labour
registered unemployment from the Lithuanian market will become visible in the second half of this
Labour Exchange. According to the exchange, year and in 2012.
registered unemployment decreased from a first-
Higher employment and increasing net income, not
quarter average of 14.1% (303,700) to 11.1 %
a lower savings rate, should be behind gradually
(229,200 on August 1).
increasing sustainable consumption. Let’s hope
The number of registered unemployed fell by 30.7% that, in this respect, this economic cycle will be
from its peak in July 2010, when it reached different from previous one.
330,600, and the registered unemployment rate
peaked at 15.3%.
In July, the industrial confidence indicator reached Nerijus Mačiulis
its highest level since November 2007 (+6), while
Vaiva Šečkutė
the employment forecast in industry increased to its
highest level since the beginning of 2007. We
Swedbank
Economic Research Department Swedbank’s monthly newsletter The Lithuanian Economy is published as a service to our
SE-105 34 Stockholm customers. We believe that we have used reliable sources and methods in the preparation
Phone +46-8-5859 1028 of the analyses reported in this publication. However, we cannot guarantee the accuracy or
ek.sekr@swedbank.com completeness of the report and cannot be held responsible for any error or omission in the
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on other material as well. Neither Swedbank nor its employees may be held responsible for
Legally responsible publisher
losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’s
Cecilia Hermansson, +46-8-5859 7720.
monthly newsletter The Lithuanian Economy.
Nerijus Mačiulis, +370 5 2582237.
Lina Vrubliauskienė +370 5 258 2275.
Vaiva Šečkutė, +370 5 258 2156.
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