Market participants polled by LFMI predict a deceleration of the so-far rapid economic growth in Lithuania. They believe that the country’s economy will rise by 6.6 percent in 2008. On the one hand, banks tighten their previously rather loose lending standards, stiffen the requirements for borrowing and so restrict the growth of borrowing. On the other hand, consumers tend to be less optimistic about the future of the Lithuanian economy, which in turn diminishes their willingness to borrow and dampens consumption.

As economic growth weakens, the long-standing defects of the Lithuanian economy - low labour productivity and protracted reforms, with restrictions in the land and labour markets having negative effects - will become increasingly more pronounced.

 

 

Market participants think that the shadow economy will increase: according to the survey, the share of the shadow economy accounted for 17.8 percent of GDP in 2007 and will make up 18.5 percent of the entire economy in 2008. The LFMI survey participants changed their earlier expectations regarding the informal sector: six months ago they predicted that the share of the shadow economy will account for 17.3 percent of GDP in 2008.

 

The LFMI survey participants were asked to evaluate the causes of declining “envelope” payments to workers – one of the components of the underground economy. The State Tax Inspectorate’s tightened control and its well-organised fight against “envelopes” gained nearly one-fourth of all answers (24 percent). The second important cause (18.7 percent of answers) that enabled legalising wages was a reduction of the personal income tax. Other frequently mentioned elements were a shortage of the labour force, employees’ increasing bargaining power and self-awareness, a heightening need for social guarantees, and growing transparency of companies’ activities.

 

However, a number of factors will come into play in 2008 that may have an expansive effect on illicit activity. For instance, excise taxes on alcohol and tobacco products have been raised and changes are anticipated as regards the issuance of business certificates. It is possible that while providing the 2008 forecasts, market participants took into consideration the recently actively contemplated plans to change personal income taxation and to increase the tax burden.

 

 

As the LFMI survey shows, the tax burden has barely changed since 2007 and will constitute 31.9 percent of GDP in 2008. LFMI has calculated that the tax burden will be 41.1 percent of NNP in 2008, or 3.1 percentage points larger than in 2007.

 

 

After leaping in the past period, both imports and exports grew at a lower rate in 2007. According to the LFMI survey, import growth will slightly exceed export growth in 2008. Market participants estimate that imports and exports edged up by 15.6 and 12.8 percent respectively in 2007. They project a continued softening of import growth in 2008: imports are expected to rise by 13.7 percent, while exports will grow by 12.7 percent this year. Declining imports are likely to be explained by falling demand on the domestic market.

 

 

 

Market participants believe that mounting energy and food prices, with increasing disposable income, were the main drivers of price growth.

 

A general price growth has been the result of booming consumption, reinforced by growing money supply. Surging prices of food products are related to global trends, widening export opportunities and price convergence. Both global trends in the markets of energy resources and changes in terms of supply between Lithuanian companies and energy suppliers can be attributed to climbing prices of utilities, energy, fuel and transport.

 

Prices of certain commodities (alcohol, tobacco products and fuel) were led by increases in the tax burden.

 

According to the LFMI survey, consumer prices grew at a lower rate in 2007 as compared to the official statistics. This can be explained by differences in methodologies: the experts in the LFMI survey evaluate the growth of the average level of prices of all consumer goods and services, rather than of a statistical basket of consumer goods and services.

 

Market participants raised their 2008 forecast of consumer price growth – from 5.2 percent reported six months ago to 7.3 percent provided in the current survey. This signals that market participants’ expectations regarding price growth have changed: in the previous survey they projected prices to grow at a lower rate in 2008, but in this survey they are more pessimistic and predict that prices will rise at a similar pace.

 

 

Unemployment is expected to increase slightly in 2008. As the LFMI survey indicates, the rate of unemployment stood at 4.4 percent in the end of 2007 and will slightly rise in 2008, to 4.6 percent. Interestingly, market participants changed their opinion regarding the rate of unemployment in 2007 and 2008. Six months ago they thought that unemployment would continue to fall after having steadily declined for a long period of time. However, in the current survey market participants predict a negligible increase in the unemployment rate. This revision reflects dwindling optimism about economic development in the future.

 

Growing income from labour and social assistance benefits keep augmenting household income. According to market participants, the average monthly household income amounted to 2,823 litas in 2007 and was 14 percent higher compared to 2006 (2,472 litas). Average household income is expected to grow at a slightly lower rate in 2008 than in 2007 (by approximately 10 percent compared to 14 percent). Nonetheless, the financial situation of households will continue to improve - average household income will amount to about 3,114 litas per month. It is worth to note that although consumer price growth has been very rapid in recent years, household income has been increasing at an even faster pace. Evidently, not just nominal, but also real household income, plus the purchasing power, are on the increase.

 

As the LFMI survey indicates, wages continue to surge at a rapid pace. Market participants believe that average net earnings increased by more than 18 percent in 2007 and amounted to 1,581 litas per month. According to market participants, average monthly net earnings will grow at a slightly lower rate in 2008 than in 2007, but the growth will still remain robust: average monthly net earnings are expected to edge up by 12.5 percent, amounting to 1,779 litas at the end of 2008.

 

The LFMI survey respondents think that namely rising earnings is the primary cause discouraging people from emigrating (62 percent of respondents reported that incentives not to leave the country were aggrandising and 77 percent pointed to rising earnings as the major factor behind them).

 

 

The profit margin and the return on equity are expected to slightly decrease. According to market participants, the profit margin averaged 6.9 percent in 2007, while the return on equity was 11.7 percent. As the LFMI survey indicates, the profit margin will slightly drop and average 11.1 percent in 2008, with the return on equity declining to 6.5 percent. The year 2007 proved to be fairly generous to Lithuanian companies as the heightening demand significantly augmented companies’ income.

 

According to market participants, the share of reinvested profits averaged 38 percent in 2007, which is 6 percentage points less than in 2006. Market participants do not expect any sizeable changes in 2008. They think that the share of reinvested profits will average about 39 percent this year. Six months ago the LFMI survey respondents expected this indicator to increase to 47 percent in 2008.

 

Market participants estimate that expenses on research and development accounted for 4.9 percent of companies’ total expenses in 2007, an insignificant decline compared to 2006. The share of expenses on research and development is expected to go up to 5.5 percent in 2008.

 

 

 

The price of money is expected to mount. According to market participants, interest on both 1 to 12-month loans and loans of more than one year was about 7 percent in 2007. The respective indicators for 2007 reported in the previous survey were 6.29 and 6.27 percent. This revising of indicators points to changes in market participants’ expectations and their evaluation of the economic situation, which reflects banks’ stricter lending policies.

 

The LFMI survey participants predict that the price of borrowing will remain similar in 2008: 1 to 12-month loans and those over one year will cost on average 7.2 and 7 percent respectively.

About the methodology 

 

LFMI launched the survey of economic variables in 1997. The major goal of the LFMI survey is to provide estimates and forecasts of economic variables in Lithuania based on the opinion of market participants and to analyse factors that have an influence on these estimates and forecasts. The survey is also aimed at comparing the estimates of market participants with official statistics and data from other sources and to offer interpretations of the most distinct differences.

 

The survey is based on the expert consensus paradigm originating from the theory of rational expectations. This theory states that economic indicators can be related to certain processes in the economy, and market participants use all available information to make estimates and forecasts concerning these processes. The more information market participants possess, the more credible their estimates and forecasts are. It is likely that individuals who are engaged in day-to-day business activities have the most information about the economy, while their successful performance reflects their ability to process this information.

 

Forty-two experts participated in the 21st survey. This survey is not representative: LFMI does not aim to have a representation of specific sectors of the economy or regions or enterprises. Rather, LFMI invites business leaders and analysts to participate in this survey.

 

The current survey was supported by joint stock companies IF draudimas, ERGO Lietuva gyvybės draudimas and SAMPO pensijų fondų valdymas.