Country Report Lithuania July 2008

Outlook for 2008-09

• The coalition government, led by the Social Democratic Party (LSP), is likely to survive until the election, due in October 2008. The election looks set to produce an ideologically disparate and probably unstable coalition.
• Fiscal policy has been restrained, but is looser than is justified given the continuing need to stabilise the economy. Measures to promote disinflation will require attention from the authorities over the forecast period.
• The Economist Intelligence Unit forecasts that real GDP growth will slow to 5.5% in 2008 and to 4.8% in 2009, a reduction compared with our previous forecast of 5.6% and 5%, respectively, owing to higher inflation.
• We have raised our forecast for average annual inflation, because of an increase in our forecast for global food and oil prices. Inflation will accelerate to 10.4% in 2008, before declining to 6.7% in 2009.
• The current-account deficit was 13.7% of GDP in 2007. The deficit will stay high in 2008-09, at an annual average of around 11% of GDP, as a rise in debt-servicing costs drives up income debits.

Monthly review

• A number of new parties have further fragmented the political scene ahead of the parliamentary election, due in October. Although small, they are likely to draw populist votes away from the Labour Party and Order and Justice.
• A new law on political advertising in broadcast media bans parties from purchasing airtime directly. Instead, it will be allocated by the Central Election Commission on the basis of the number of seats won in the previous election.
• Following the passage of a law on fiscal restraint, the government has approved a draft budget for 2009 that aims for fiscal balance. However, its revenue predictions seem optimistic.
• Inflation has continued to accelerate to new highs, reaching 12% year on year in May. High inflation is making euro adoption before 2012-13 look increasingly unlikely.
• Real GDP growth slowed to 6.9% in the first quarter of 2008, from 8% in the previous quarter, on a revised estimate from Statistics Lithuania. Private consumption growth was still brisk, although it slowed year on year.
• Unemployment has continued to fall, and job-creation has risen. There was a significant drop in the number of long-term unemployed in the first quarter of 2008.