Lithuania Business Forecast Report Q2 2008

Publication Date	April 2008
Publisher	Business Monitor
Product Type	Report
Pages	40
ISBN Number	1750-2152
Product Code	BMI01532

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Summary

Growth Slowing, But Still Strong

Lithuania's economy grew by a little less than expected in the final months of 2007 and is expected to lose further momentum going into H208. Nevertheless, growth remains reasonably strong and the cyclical downswing is not yet sufficiently well established to be able to brush aside concerns of a boom-bust scenario playing out in the next year or so. Aggregate demand at the end of 2007 was above and growing faster than the economy's supply potential, placing upward pressure on domestic prices (including wages) and increasing external vulnerability through a yawning current account deficit and rising external debt. BMI still expects the economy's landing to be soft rather than hard, but downside risks are building, not just because of the benign neglect of policymakers but also, and increasingly more so, because of uncertain prospects for the global economy and international financial system.

In the political arena, the coalition government recently gained a parliamentary majority by adding a fifth party to its ranks. However, with elections approaching, this does not mean it is now more likely to implement measures to cool the overheating economy. Indeed, it is more likely that the main parties will be drawn towards electioneering rather than reforming in the near term as they seek to boost their flagging support ahead of polling day.

On balance, tighter financial conditions, rising consumer prices, falling house prices and a gradual decline in confidence should contribute to a steady reduction in real GDP growth in 2008-09. We expect the economy to expand by 6.5% in 2008, down from 8.8% in 2007, and by 5.0% in 2009.

The inflation rate is now projected by BMI to average 8.4% in 2008, up from 5.7% in 2007, and to fall to 6.0% in 2009. The budget deficit is expected to narrow slightly in 2008 but fiscal policy will remain expansionary.

The current account deficit is projected to narrow in 2008 on the expectation that domestic demand will slow and export performance will remain reasonably robust. Non-oil export activity will be adversely affected by a softening of demand in the EU and by a further appreciation of the real exchange rate; but exports of refined petroleum products will rebound as production is ramped up at the Mazeikiu refinery.

Content

Executive Summary
- Growth Slowing, But Still Strong
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Domestic Politics
- Political Cycle To Test Coalition Unity
- The coalition government recently gained a parliamentary majority by adding a fifth party to its ranks. However,
- with elections approaching, this does not mean it is now more likely to implement measures to cool the
- overheating economy.
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Growth To Slow, But Will The Downturn Be Orderly?
- The economy is showing signs of slowing, but not enough to assuage fears that it could be headed for a
- hard landing.
- Fiscal Policy
- Government's Economic Management Criticised By EU
- The budget deficit is expected to narrow slightly in 2008 but fiscal policy will remain expansionary.
- Balance Of Payments
- Exports Perform Well But Deficit Remains Large
- We believe that the current account deficit will narrow in 2008 as a result of slowing import demand and robust
- export growth. The risks are to the upside, however, and the economy will remain vulnerable to external shocks.#
Chapter 3: Special Report
- Looking Beyond 2008
- US: The Rebalancing Act
- Unwinding The Imbalances
- We believe that a substantial, multi-year shift in the US external accounts is under way. A weak US dollar and
- subdued domestic consumption should lead to a narrowing in the US's structural current account deficit.
- China: What If We're All Wrong?
- Our Core Scenario For China
- We are retaining our positive headline growth projections for China across the forecast period to 2012, with
- our expectations of the continued success of the urbanisation process and export-driven growth model
- underpinning our assumptions.
- Japan: Immigration Key To Long-Term Growth
- Demographic Woes Portend Long-Term Decline
- Immigration remains the only realistic way that Japan can overcome its long-term economic challenges.
Chapter 4: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Outlook
List of Tables
- Table: Lithuanian Cabinet (As Of April 2008)
- Table: Economic Activity
- Table: Fiscal Policy
- Table: Balance Of Payments
- Table: BMI Business and Operational Risk Ratings
- Table: BMI Legal Framework Ratings
- Table: Lithuania FDI Inflows
- Table: BMI Trade Ratings