On March 3, the Lithuanian Free Market Institute (LFMI) staged a press conference to present its twenty-third survey of the Lithuanian economy, covering estimates of economic indicators for 2008 and updated forecasts for 2009. As the latest survey shows, the share of the shadow economy in GDP will grow by 5 percentage points, the national budget will fail to collect about 5.3 billion Litas, and the unemployment rate will soar to 11 percent this year. Below is a summary of the LFMI survey findings.
The 23rd Survey of the Lithuanian Economy: nearly one litas in four goes unreported
One-fourth of economic decline has been due to governmental decisions
The survey of the Lithuanian economy conducted by LFMI indicates that economic growth in Lithuania slowed down in 2008, as compared to 2007, standing at 3.4 percent. The respondents of the survey project that the country’s economy will contract and most macroeconomic indicators will deteriorate at an explosive pace. GDP growth will be negative, minus 2.8 percent, this year.
The survey participants were asked to indicate the causes of the projected economic recession (falling income, decreases in operational costs, and a reduction of employees). According to them, 26 percent of economic decline have been the result of governmental decisions and 66 percent were caused by the situation on the market.
The survey demonstrates that as GDP growth becomes negative, foreign trade will grow at a markedly lower rate as well. Market participants think that export and import growth accounted for 15 and 14 percent respectively last year, whereas in 2009 exports and imports are projected to rise by only 3 percent each.
The shadow economy will increase by 5 percentage points
The worsening economic situation and the increased tax burden will fuel the growth of the shadow economy. The LFMI survey participants believe that the share of the shadow economy remained nearly the same in 2008 as in 2007, accounting for 18 percent of GDP. However, the underground economy is expected to expand significantly in 2009. According to the survey, the share of the shadow economy will increase by 5 percentage points and account for 22.7 percent of GDP. This means that nearly every fourth litas is in the black economy. It was only as far back as in 1998 that the LFMI survey participants projected a higher growth of the shadow economy as compared to the current survey.
Asked to indicate the proportion of economic agents who at least in part operated or were going to operate underground, market participants reported that 28 percent of businesses were involved in illicit activity in 2008, and a total of 40 percent of the Lithuanian enterprise will go off the books in 2009. (The shadow economy refers to “envelope” wages, income concealing, illegal production or service provision, and other activities tailored to hide income.) The goal of this question was to find out the changes in the scope of the shadow economy in 2008 and 2009 as a proportion of economic agents involved in unreported activity, rather than a share in GDP.
The unemployment rate is expected to hit double-digit figures
As the economy moderates, the level of unemployment usually tends to rise and price growth predominantly slows. According to the survey, the unemployment rate was 6.6 percent in Lithuania at the end of 2008. The survey shows that the rate of unemployment will stand at 10.8 percent at the end of this year. Economic moderation will curb the growth of consumer and producer prices. Annual growth of consumer prices was nearly 10 percent at the end of 2008. Market participants project that annual growth of consumer prices will decelerate and stand at 6.1 percent at the end of this year.
The tax burden is increasing, tax revenues are declining
As a result of higher taxes, the state and its services will cost Lithuanian taxpayers 3.6 billion Litas more in 2009 as compared to 2008.
[1] According to the survey, the tax burden accounted for 32.4 percent of GDP in 2008. Market participants believe that Lithuanians will pay 36.7 percent of the county’s GDP as a total tax bill in 2009.
Such a sudden increase in the tax burden has been recorded for the first time throughout the entire history of the survey of the Lithuanian economy. As the LFMI survey shows, this year’s considerable increases in the tax burden will not help collect planned revenues to the national and the State Social Insurance Fund (SoDra) budgets. It is projected that the national budget will collect 87 percent of its planned revenues. The situation with the SoDra budget is expected to be even more troublesome: the LFMI respondents think that the SoDra will manage to collect only 84 percent of its planned revenues. Given the size of the national and SoDra budgets planned for 2009, it would mean that 5.3 billion Litas would not be collected to the two budgets.
Household income, savings and investments will decline
As the Lithuanian economy moves from the stage of a rapid economic growth to the cycle of recession, market participants have ever more pessimistic outlooks as regards people’s abilities to earn and save. According to the survey, the average monthly money household income amounted to 3,180 Litas in 2008. The average monthly household income is expected to decrease by 152 Litas and total 3,029 Litas this year. Income per household member will amount to 1,325 and 1,262 Litas in 2008 and 2009 respectively, down by 63 Litas or 5 percent.
[2]As the LFMI survey indicates, personal earnings will shrink as well. Market participants think that average monthly net earnings totalled 1,797 Litas in 2008. They believe that average monthly net earnings will drop by 5 percent, amounting to 1,701 Litas in 2009. Such decreases in household income and personal earnings have been reported for the first time since the inception of the LFMI survey in 1997.
According to the survey, declining household income will force people to save and invest less. Market participants polled by LFMI think that average household savings amounted to 390 Litas per month in 2008 and average household investments totalled 283 Litas per month. They project that household savings will go down by 124 Litas, amounting to 265 Litas per month, and household investments will diminish by 112 Litas, totalling only 172 Litas per month.
The financial situation of companies is forecast to deteriorate
The LFMI survey demonstrates that the financial situation of private companies will deteriorate in line with that of households’. Market participants estimate that the profit margin averaged 5.7 percent in 2008 and will drop to 3.4 percent this year. According to the survey, one litas of company owners made profit of 10.1 cents during one year period. The return on equity is expected to decline in 2009, averaging 6.1 percent.
Shrinking corporate profits will force businesses to invest fewer funds. The survey indicates that the share of reinvested profits averaged 34 percent in 2008. The share of reinvested profits is expected to decline, averaging 31 percent in 2009. Expenses on research and development will also decrease. Market participants think that expenses on research and development accounted for 4.2 percent of companies’ total expenses in 2008. The LFMI survey indicates that the share of expenses on research and development will shrink and account for 3.3 percent in 2009.
The price of borrowing will remain high
As the LFMI survey shows, the price of borrowing will not go down significantly. According to market participants, interest on both 1 to 12-month loans and loans of more than 5 years stood at 10.7 percent in 2008. The LFMI survey participants predict that the price of borrowing will remain high in 2009: interest on loans is expected to be 10.1 percent.
About the survey
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. Forty-five experts participated in the 23rd 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.
[1] Calculated based on the 2008 GDP, taking into account the planned GDP for 2009 (minus 2.9 percent), plus disregarding the GDP deflator.
[2] According to
Statistics Lithuania, average household in Lithuania consists of 2.4 household members.
