Country Report Lithuania February 2009

Outlook for 2009-10

• The new governing coalition, led by the centre-right Homeland Union-Lithuanian Christian Democrats (TS-LKD), is likely to face fractures over the forecast period, despite having a large majority in parliament.
• Public discontent with the government's austerity programme will intensify as the economic downturn gathers pace.
• The government aims to cut spending and boost revenue in order to narrow the budget deficit, but revenue collection will suffer from the downturn in economic activity, and budget targets will continue to be overshot slightly.
• Tight lending conditions and declining consumer confidence will lead to a slump in private consumption and investment in 2009. We forecast that real GDP will fall by 4.8% in 2009 and by 1.2% in 2010.
• A fall in domestic demand, together with lower commodity and oil prices, will bring down average annual inflation to 4.3% in 2009. We expect a slight increase, to 4.8%, in 2010, as commodity prices and power prices rise.
• Falling import demand will lead to a marked narrowing of the current-account deficit as a share of GDP in 2009. A recovery in exports in 2010 will bring the deficit down further, to less than 8% of GDP.

Monthly review

• The government has survived its first challenges, and remains wedded to its austerity programme despite some dissent from within the coalition and a public demonstration in mid-January that turned violent.
• The first round of the presidential election will be held on May 17th. Uncertainty still surrounds the candidacy of the likely front-runner, Dalia Grybauskaite, Lithuania's European commissioner.
• The 2009 budget has been approved by parliament. It targets a deficit of 2.1% of GDP. A presidential veto on a proposed tax change has been upheld by parliament, leaving the government with a revenue shortfall of 0.3% of GDP.
• Revised data for the third quarter of 2008 show a more marked slowdown in GDP growth than previously estimated. Real GDP rose by 2.9%, with private consumption growth, at 4.7%, much less buoyant than in earlier estimates.
• Data for the final quarter suggest that Lithuania is moving into recession. Retail sales fell by almost 12% year on year in November, and industrial output declined by 6.9%. Confidence indicators are at their lowest ever levels.
• The current-account deficit narrowed to 9.6% of GDP in the third quarter, according to data from the Bank of Lithuania (BoL, the central bank). The main contributory factor was a 14% contraction of the deficit on goods trade.

Source: Country Report