LFMI presents the latest survey of the country’s economy, covering forecasts for 2011 and 2012.

The Lithuanian Free Market Institute (LFMI) presents its twenty-eighth survey of the Lithuanian economy, covering forecasts for 2011 (updated) and 2012. This survey was carried out in July 2012. Fifty-five experts participated in the current survey.

Summary of results
(The full survey can be downloaded here)

The 28th survey of the Lithuanian economy conducted by LFMI shows that the growth of Lithuania’s GDP will accelerate in 2011 and 2012, prices will soar more rapidly, but unemployment will slump only slowly. Market participants predict that GDP will grow by 4.9 percent in 2011 and by 4.6 percent in 2012. The rate of unemployment is expected to stand at 14.6 percent and 12.8 percent in this year and the coming year respectively.

Exports remain a powerful factor of economic growth in Lithuania. Exports are expected to surge by 17 percent and 14 percent in 2011 and the coming year respectively. Mounting prices of exported and imported commodities can be partly attributed to rising exports and imports.

The share of the shadow economy will grow by one percentage point in 2011, compared to the previous year; the underground economy is not expected to contract considerably in 2012. The share of the shadow economy will account for 29 percent of GDP in 2011 and 27 percent of GDP in 2012. The LFMI respondents think that 45 percent of businesses were at least in part be involved in illicit activity in 2011.

According to the LFMI survey participants, smuggling of cigarettes, alcohol, fuels and other commodities accounts for 35 percent of the entire shadow economy. Unreported remuneration for work paid in “envelopes and illegal employment constitute a second largest share of illicit activity, accounting for 23 percent of the entire shadow economy. Provision of goods and services when taxes are not paid and the concealment of economic activity make up 21 percent of the informal sector. Trade in illegal goods (excluding smuggled goods) and services comprise 12 percent of the underground economy.

The financial situation of households will improve in Lithuania. LFMI survey demonstrates that earnings, household income and household savings will grow both in 2011 and 2012. Average net earnings are expected to rise by 4 percent in 2011 and by 5 percent in the coming year. Average disposable household income per household member will soar by as much as 11 percent and 7 percent in 2011 and 2010 respectively. Household income will grow at a higher rate compared to consumer prices, which is a sign of the households’ increasing purchasing power.

The financial situation of companies will ameliorate, the profit margin will increase and the share of reinvested profits will grow in 2011 and 2012. The profit margin is expected to average 4.7 percent and 5.3 percent in 2011 and 2012 respectively.
67 percent of respondents reported that seeking to bolster investments of enterprises operating in Lithuania, to reduce unemployment and to stimulate the economy, reinvested profits should be taxed at a zero rate of the corporate profit tax.

Three-fourths of the LFMI survey participants think that the business environment in Lithuania has not been improving since 2009. Evidently, market participants think that the goal to cut the red tape has not been attained so far, and enterprises are feeling no essential effects of such reduction at present.

The price of borrowing will be slightly lower in 2011 than in 2010 and will climb insignificantly in 2012. Changes in interest rates in the near future will be determined by how rapidly the European Central Bank will increase its interest rates.

About the survey

LFMI launched the survey of economic variables in 1997. 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.