Lithuanian economy up 8.1 percent in first half of 2007

The Baltic Times
TBT Staff
August 08, 2007

VILNIUS – Gross domestic product in Lithuania grew 8.1 percent over the first six months of the year, slightly beating analysts’ expectations.
According to the statistics department, growth was led by gains in construction, wholesale and retail, real estate and communications sectors. In nominal terms, GDP amounted to 43.5 billion litas (12.5 billion euros), the department said.

Analysts are predicting that full year economic expansion will amount to 8 percent, which contrasts to the red-hot, double-digit growth economies of Estonia and Latvia. As a result, the latter two are particularly susceptible to an overheating and subsequently a hard-landing scenario.
“Domestic consumption, which continues to grow on the back of strong consumer expectations, accounts for a large part of GDP. Services export growth is also good, [as well as] industrial export figures, apart from difficulties at Mazeikiu Nafta,” Rimantas Rudzkis, chief analyst with DnB Nord Bankas, told the Baltic News Service.
Regarding the second half of the year, he said, “The fundamental factors are unlikely to change very much. However, we cannot rule out the possibility of slower growth given the first reports of falling real estate prices from neighboring Latvia and Estonia.”

Lithuania’s economy has shown itself to be more robust than analysts thought at the beginning of the year. Last month Hansabank was forced to revise its forecast from 7 to 8 percent for annual GDP growth.
“This year Lithuania’s economic growth will remain robust, underpinned by growing consumption and a very rapid expansion of sectors that provide for domestic needs,” said Tomas Andrejauskas, head of the bank’s financial services department.
But there was a warning flag up as well, he added. “Unfortunately, as a result of intense business expansion and out-migration, there is a workforce shortage in many business areas already,” he said. “That has created favorable conditions for excess growth of prices and wages.”
In a recent report, Hansabank said that the Baltic economies are on different cycles, with Estonia and Latvia’s slowing down while Lithuania’s expands. As a result, their rates of growth could come close to converging in 2008.

On the downside, inflation is also picking up in Lithuania. In June the annual rate reached 5 percent, far over the level allowed by the Maastricht treaty used for adopting the euro.
Inflation has been fueled by construction prices, which soared 1.6 percent in June alone and 14.3 percent over the year as of the end of June.