The Lithuanian Economy

Transcription

1 Macro Research Macro Research - The Lithuanian Economy 12 December, 2013 The Lithuanian Economy Newsletter Low external and domestic inflationary pressures favourable for EMU membership Average annual inflation decreased to 1.3% Higher wages have not caused higher inflation so far Lithuania s joining EMU in 2015 is the most likely scenario Low commodity prices behind weak inflation Annual inflation remained at 0.5% in November as prices decreased in a month by 0.. The main reason for this year s weak inflation is lower commodity prices. Easing pressures from the commodity market might explain why companies did not transfer costs from the hike of about 2 in the minimum monthly wage to consumers. Still-recovering demand also provided little room for price increases. High wages have not raised inflation so far Average annual wages increased by 6. in the third quarter of this year compared with the same period a year ago. Wages rose faster than productivity this year; this could create more inflationary pressure in However, we do not expect significantly higher inflation than in 2013, mainly due to lower commodity prices; however, a weaker euro will counteract this decrease. Little uncertainty about Lithuania fulfilling Maastricht criteria The chances of Lithuania fulfilling the Maastricht criteria are increasing. Now there is more certainty about inflation and public finances, which had been the main obstacles to euro adoption. There is also the political will to adopt the common European currency. Therefore, it is becoming increasingly likely that Lithuania will join the EMU on January 1, % 6% Consumer prices 1.75% % % % % % -0.75% Monthly growth (rs) Annual growth (ls) Average annual (ls) Source: Statistics Lithuania Nerijus Mačiulis , nerijus.maciulis@swedbank.lt Vaiva Šečkutė , vaiva.seckute@swedbank.lt Laura Galdikienė , laura.galdikiene@swedbank.lt December 12, 2013 Please see important Please see disclosures important disclosures at the end at the of end this of document this Page 1 of 5

2 Low external and domestic inflationary pressures so far Inflation this year has been weak because of low commodity prices and limited possibilities for transferring the cost increase from the higher minimum monthly wage. We expect a bit higher inflation in 2014, but average annual inflation and the budget deficit most likely will not breach the thresholds set by the Maastricht Treaty for next spring. It is becoming increasingly likely that Lithuania will join the EMU in Inflation fell due to lower commodity prices and stillrecovering domestic demand Low commodity prices behind weak inflation Annual core inflation has been higher than headline inflation 1 for five months now, indicating very low external inflationary pressures. Headline inflation decreased to 0.5% in November at an annual rate - a low last seen at the beginning of Lower oil prices this year helped push down Lithuanian inflation. Prices of fuels, lubricants, and regulated prices, which are highly dependent on energy prices, have been decreasing for a few months now on an annual basis - these have lowered inflation the most. Prices of fuels and lubricants now are 3% lower than a year ago. Heating prices this year have contracted by 8.3% on average, compared with a 12.5% expansion last year The price fall in telephone services was also bigger than in the previous year and therefore had a bigger effect on lowering inflation. Telephone services have on average been cheaper this year by 4.6%, compared with the last couple of years. Lithuania already had the cheapest communication services in the EU last year, according to Eurostat. This is a result of the strong competition amongst mobile phone operators, which has intensified further this year. HICP inflation, % Contribution to annual CPI 5% 3% 1% Source: Eurostat. Headline Core(excludes energy and unprocessed food) Downward pressure from lower commodities will become milder in % Food Regul. prices (approx.)* Fuels and lubricants Alcohol, tobacco Other Communications CPI *includes gas, electricity, heating, transportation, water prices Source: Statistics Lithuania, Swedbank Because of this year s good harvest, food prices in the commodity markets have been decreasing for a few months now (according to the IMF commodity price index 2 ). This has had a tangible effect on food prices in Lithuania they have been falling for most of the last six months on a monthly basis. Core inflation (excluding energy and unprocessed food), although higher than headline, is still at its lowest since the beginning of Lower commodity prices might explain why companies did not transfer the higher costs from the higher minimum wage to consumers. The minimum monthly wage has increased by about 2 in a year to LTL 1,000 (EUR 290) since the beginning of Domestic demand has only more recently started to show tangible signs of recovery; this was also one of the reasons companies had limited possibilities to raise prices. Even though domestic demand increased by more than 2 from trough, it still remains 18% lower than its pre-crisis peak. 1 Headline inflation here is the harmonised index of consumer price (HICP) inflation 2 IMF primary commodity price index at December 12, 2013 Please see important disclosures at the end of this document Page 2 of 5

3 8% Wages increased faster than productivity this year Wage and productivity growth An oversupply in the food sector, especially of cereal, should further support a fall in food prices. We also expect lower oil prices next year due to weaker demand from China and, possibly, higher supply. The decrease in commodity prices last year was reinforced by the stronger euro. This trend should reverse during Commodity prices will remain low in 2014, but this effect will, for Lithuania, be counteracted by a weaker euro. Next year, alcohol and tobacco prices should increase further due to higher excise duties, which will rise in March for alcohol and in April for tobacco. This will raise inflation by approximately 0.14 percentage point. However, electricity and gas prices will decline next year, lowering inflation by about 0.2 percentage point. Higher wage growth has not raised inflation so far Average gross wages increased by 6. in the third quarter compared with the same period a year ago. This was the highest rate of growth since Wage growth in the private sector was even faster in the third quarter, wages were 7. higher than during the same period a year ago. However, about a 1 ½ percentage point increase in wages came from the higher minimum monthly wage. Moreover, Lithuania s presidency of the Council of the EU most likely had a positive effect on economic activity and wages in some sectors, such as catering, accommodations, and construction. As these developments are not permanent, wage growth should subside somewhat, going forward. Nevertheless, decreasing unemployment and the lack of skilled workers will result in solid wage growth next year. Wages have increased faster than productivity this year; this could exacerbate inflationary pressures in However, inflation will not be much higher than this year. Mainly due to cheaper commodities, producer prices have been declining for five months now, although the pace of decrease has recently eased slightly. The falling producer prices indicate that consumer prices should not rise-- at least for the next few months 15% Annual CPI and PPI in Lithuanian market 6% 1 5% - -5% Productivity, yoy Gross wage,yoy Real wage, yoy Source: Statistics Lithuania and Swedbank CPI PPI PPI ex. oil products Source: Statistics Lithuania Average annual inflation and Maastricht criterion, % Sources: Eurostat and Swedbank. Average annual inflation, Lithuania Maastricht criterion (excl. outliers) Chances of Lithuania fulfilling Maastricht criterions are high Average annual inflation in November decreased to 1.3% as prices contracted by 0. in a month. Annual headline inflation (according to the harmonised index of consumer prices) remained at 0.5% State budget revenues, months, m LTL Budget (EU supp.excl) VAT PIT Excise duties Profit tax 2013 actual 2013 plan 2012 actual Plan execution, % (rs) Source: Ministry of Finance December 12, 2013 Please see important disclosures at the end of this document Page 3 of 5

4 We expect average annual inflation to be close to 1% by the end of this year. There are few risks of Lithuania s breaching the Maastricht inflation criterion next spring because we do not see average annual inflation rising significantly in the beginning of that year. Higher probability of euro adoption in 2015 National budget revenues were 2.1% higher than planned during January-November of this year. Although GDP growth was slower than expected, tax revenues were not hurt because the weaker growth was caused by a higher base and lower exports (which are not taxed). We expect a general government budget deficit of less than 3% of GDP this year. The budget deficit will decrease next year as well. Now there is more certainty about inflation and public finances, which had been the main obstacles to Lithuania s joining the EMU. There is also the political will to adopt the common European currency. According to a study by the Bank of Lithuania, due to euro introduction Lithuania s GDP would be higher by % in 2022, and its benefits would thus significantly exceed the one-off costs. 3 This also might be the time when Lithuania will be ready (fulfil all Maastricht criteria) to join the EMU at least for a while. Therefore, it is becoming increasingly likely that on January 1, 2015, all three Baltic countries will share the same currency. Vaiva Šečkutė 3 Press release, full study and presentation in English by Bank of Lithuania can be retrieved from December 12, 2013 Please see important disclosures at the end of this document Page 4 of 5

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