2012-11-14 20:40:55 - Lithuania Business Forecast Report Q3 2012 - a new country guide report on companiesandmarkets.com

We expect a centre-left coalition including Lithuania´s Social Democratic Party and the Labour Party to displace the incumbent centre-right coalition government in the upcoming parliamentary election in October. While this would create a more uncertain outlook regarding Lithuania´s ongoing fiscal consolidation efforts, we believe that the willingness to proceed with EU and eurozone convergence will preclude a departure from the fiscal consolidation agenda over the coming years.

Lithuania´s economy will continue to approach pre-crisis levels to 2014, propped up by slowly recovering final household consumption and some signs that domestic construction is benefiting from a low stock of new buildings and a low base in demand. Nevertheless, we believe that economic restructuring, which has seen imports of goods and services adjust

 

 

sharply lower in recent years, will remain key to ensuring steady positive real GDP growth over the coming years.

The Lithuanian government will struggle to meet the prescribed Maastricht fiscal deficit limit of 3.0% of GDP over the five years to 2016, as revenues will be weighed down by weaker growth. That said, a new administration (following October´s parliamentary election) is unlikely to jeopardise Lithuania´s long-term path towards greater EU integration and ultimately euro adoption. We therefore continue to forecast a gradual narrowing of the fiscal shortfall to 3.3% of GDP by 2016.

Major Forecast Changes

We have revised up our 2012 real GDP growth forecast from 0.4% to 1.9% on account of a stronger Q112 GDP reading and signs that household demand continues to recover. We see Lithuania´s current account deficit widening at a much more rapid pace than previously expected, forecasting a shortfall of 5.2% of GDP in 2012, having previously projected a current account deficit of 3.7% of GDP for the year.

Risks To Outlook

Over the near term, we acknowledge moderate upside risks to our expectation for 1.9% real GDP growth this year. The robust growth seen in final household consumption could persist for longer as confidence in the economy´s convergence process with eurozone norms suggests greater financial stability. The medium-term risks are skewed to the downside, as Lithuania may be particularly hard hit in case of a major dry-up in banking liquidity and regional contagion from a potential eurozone break-up.

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