Five reasons why we upgrade growth forecasts
Lithuanian economy performed better than expected in 2018, but changes were not due to one-off events, but rather of positive longer-term trends, which compelled us to increase growth forecasts for 2019 and 2020. There are five key reasons why we made these changes:
Risks are mainly external ones
Lithuania has no visible internal or external imbalances: public and private debt levels are exceptionally low and there are no credit nor inflationary or real estate bubbles. Belt-tightening policies implemented during the post-crisis period, influx of foreign direct investments and more broad-based growth transformed Lithuania from one of the most vulnerable to one of the most resilient regions in the EU. Yet export-driven recovery also made them increasingly open economies, dependent on the health of and access to external markets. An ongoing trade and sanctions war with Russia as well as emerging market weakness also made them increasingly dependent on the EU, hence economic performance of Lithuania to a large extent will depend on economic health of the single market. In this context, Brexit poses a real, but limited challenge. Even in hard Brexit scenario the effect is expected to be limited to no more than 0.5% of GDP. The more serious threat is the unity of the remaining EU countries, which, in times of increased protectionism, is especially important for such a small and open economy as Lithuania.
We expect economic growth to remain robust and broad-based with private consumption, investments and exports all making a positive and fair contribution. Export growth is expected to moderate, but a recent influx of foreign direct investments and higher usage of EU-funds wll act as a mitigator. Longer-term growth potential will very much depend on how successful Lithuania will be in implementing productivity-enhancing reforms, especially in education and health sectors, as well as in attracting labour and capital, which would facilitate an ongoing income convergence with the West. This will not be an easy task, since given existing demographic situation, Lithuania has to fight two fronts at the same time: to attract physical capital as well as human capital.