By Milda Seputyte
July 28, 2009 (Update2)
SourceJuly 28 (Bloomberg) -- Lithuania’s economy plunged a preliminary 22.4 percent in the second quarter, the worst recession since 1990 independence, as output crashed and retail sales slumped.
The decline, the deepest in the European Union, compares with a revised 13.3 percent contraction in the first quarter, the Vilnius-based statistics office said in an e-mailed statement today. The economy grew 5.2 percent in the same period last year. The median estimate of four economists in a Bloomberg survey was for a 17.7 percent decline. The economy shrank 18.1 percent through the first six months.
The Baltic economies of Estonia, Latvia and Lithuania are collapsing after a real-estate bubble burst, cheap credit evaporated and slacking demand in foreign markets undermined exports. The three countries, which had the EU’s fastest growing economies from 2004 to 2006, now have the steepest declines of all developing regions, the World Bank said on June 22.
“I checked whether I didn’t go blind,” said Violeta Klyviene, the chief Baltic economist at Danske Bank. “It’s either the bottom or we’ll see one in the third quarter.”
Stockholm-based SEB AB, the largest bank in Lithuania, and Swedbank AB, the biggest bank in Estonia and Latvia, face soaring loan losses in the Baltic states, which are suffering from the deepest recessions in the European Union.
Banking Losses
Swedbank and SEB both reported net losses in the second quarter after loan losses jumped and have both reduced lending in the Baltics.
“The economic decline is very deep,” Vilija Tauraite, a Vilnius-based economist with SEB Bankas, said by phone today. “Yet the bottom has been reached, we are expecting somewhat better GDP results in the second half as the effect of the high statistical basis from last year wanes.”
The Baltic region is experiencing “the hard landing” that economists, rating agencies and international institutions such as the IMF had been warning about at least since 2007.
Lithuania was supposed to have fewer economic imbalances than neighboring Latvia and Estonia, where economies expanded at a faster rate. Still, it now outstripped the 18 percent contraction in Latvia and the 15.6 percent drop in output in Estonia in the first quarter. Latvia is scheduled to release its second quarter GDP data on Aug. 10 and Estonia on Aug. 13.
‘Disappearing’ GDP
“Nobody has expected that GDP will be disappearing at this rate,” said Zsolt Papp, an economist at KBC Groep NV in London. “This will bring up the question of devaluation again in the entire region. The Baltic countries will have to seriously look at their currency regimes.”
Speculation that Latvia may be forced to give up its fixed exchange-rate system, followed by Estonia and Lithuania, spread in June after Sweden’s Riksbank boosted its foreign currency reserves, a move interpreted by some as preparation for a fallout in the Baltics.
Government officials in all three countries have said they will not devalue their currencies, and will bolster competitiveness through wage cuts and deflation.
The Baltic state, like Latvia and Estonia, is a member of the pre-euro exchange-rate mechanism, obliging it to peg its currency, the litas, to the euro. Lithuania has operated a currency board since 1994. Euro members running budget deficits must contain the gap to within 3 percent of GDP.
Output, Retail Sales
Industrial output, which accounts for about 20 percent of GDP, shrank 20.4 percent in the second quarter as domestic demand waned on lack of credit and falling wages and the global economic crisis weakened exports.
Retail sales plunged 27.7 percent in the second quarter, the statistics office said today. The decline eased to 25 percent in June from 32 percent in February, the biggest drop on record.
The economy may contract between 15 percent and 20 percent this year as bank lending remains paralyzed and demand for the Baltic nation’s exports wanes, Finance Minister Ingrida Simonyte said in an interview on July 16. The Finance Ministry plans to revise its official economic forecast after reviewing second- quarter GPD data.
Lithuania’s government is paring spending and raising taxes to tackle faltering budget revenue. Lawmakers last week approved a second revision to the 2009 budget plan that includes lifting the value-added tax rate to 21 percent from 19 percent and cutting wages, after reducing spending by 7 percent of gross domestic product in the first six months.
‘Already History’
The second quarter is “already history and the fact that the government managed to cope with public finances shows that additional budget cuts were well-timed,” Tauraite said. She said no major collapses are expected in public finances that would push the country to ask for a loan from the International Monetary Fund.
The government has not followed neighboring Latvia in requesting a bailout from international lenders such as the IMF. Simonyte said she expected no such need in the near term. Still, she didn’t rule out that the country may need aid in the future.
To contact the reporter on this story: Milda Seputyte in Vilnius at
mseputyte@bloomberg.netLast Updated: July 28, 2009 05:19 EDT