Economic storm clouds gather over EU tiger Lithuania

VILNIUS (AFP) — Lithuania’s general election Sunday comes as storm clouds gather over the EU “tiger” economy, with a long-running boom tailing off and grinding inflation hurting voters.

Prime Minister Gediminas Kirkilas, whose Social Democrats are lagging behind the right-wing and populist opposition in the opinion polls, has said that Lithuania will not be able to escape the chain reaction of the global financial crisis.

“But we have the means to meet this challenge,” he insisted on Thursday.

“Today, as things stand, the situation can be controlled, and we have it under control,” he said.

This Baltic state of 3.4 million people, which broke free from the crumbling Soviet bloc in 1991, has flourished in recent years, notably since Lithuania joined the European Union in 2004.

Output expanded 7.5 percent in 2006, and 8.9 percent last year.

Growth is expected to remain solid this year, at around 6.0 percent, according to central bank estimates, or about 5.0 percent according to many experts.
But Lithuanians are looking nervously to their smaller Baltic neighbours and fellow-EU tigers Estonia, which has slid into recession, and Latvia, where growth has stalled.

Both neighbouring countries have been hit hard by slumping domestic consumption in the face of spiralling inflation and credit clampdowns, as well as the international crisis which has hit exports.

“I think there’s a six-to-nine-month gap between developments in Latvia, Estonia and Lithuania,” said Vadimas Titarenko, chief economist at the bank DnB Nord.

“I think the worst point will be in 2010. But I’m not expecting much in 2009. There are two scenarios. The optimistic one is 2.0-percent growth. The pessimistic one is a 1.0-percent contraction. I’m usually more of an optimist than a pessimist, but now much less so,” Titarenko told AFP.

His prediction, backed by other analysts, contrasts with a central bank forecast of around 4.0-percent growth in 2009.

For Gitanas Nauseda, chief economist at SEB Bank in Vilnius, “the discussion in this country about a soft or hard landing is still open” but things are set to get “very hard for Lithuanian households and industry.”

Lithuania’s stronger industrial base has provided a bulwark, thanks to solid demand from neighbouring Russia that has offset falling trade within the EU, but that is small comfort.

“The worst thing imaginable is that both Russia and the West are doing badly. And that might happen,” warned Raimondas Kuodis, head of the central bank’s economics department.

Since 2007, Lithuania’s growth has been accompanied by rampant inflation, which hit an 11-year high of 12.5 percent in June.

Recent data has offered a ray of hope — inflation dipped to 11.0 percent in September — albeit too little to please disgruntled consumers.

Analysts note that consumers in the EU’s ex-communist states are generally harder hit by global price rises than their Western counterparts, because food, fuel and heating costs, which have risen most, represent a much higher share of family budgets than in richer countries.

Inflation has also been driven by local factors such as rising wages and money sent home by migrants — 300,000 Lithuanians have left to work in Western Europe, mostly in Britain and Ireland, since 2004.

Inflation is expected to take off again after a round of energy price hikes in coming weeks.

Critics allege that Kirkilas’ two-year-old government has done too little during the boom years to prepare for leaner times — ducking unpopular measures like public sector reforms and spending cuts, and failing to reduce red tape and attract more foreign investment.

“They got used to living in a very good macroeconomic environment. One where you don’t have to do anything,” said Titarenko.

Finance Minister Rimantas Sadzius batted aside the criticism, saying, “I don’t agree we have done nothing. How did such economic development manage to take place?”

Other analysts blamed the fragility of Kirkilas’ coalition — which even with five parties has only a narrow parliamentary majority — as a reason for its purported reform failure.