The Lithuanian Economy

Monthly newsletter from Swedbank’s Economic Research Department

by Nerijus Mačiulis No. 01 • 31 January 2011

Industrial production is booming, but so are producer prices

 Lithuanian industrial production went up by 6.6% in 2010. Most of the increase may
be attributed to the recovering manufacturing sector, which increased by 8.2% last
year. Although industrial production is still behind its peak, it is expected to reach
new highs this year.
 In 2010, manufacturing of paper products, chemicals, and pharmaceuticals
recovered quickly, and exceeded pre-crisis levels. Manufacturing of wearing
apparel and non-metallic mineral products, rubber and plastic products, and motor
vehicles grew at the fastest pace, but still lagged behind boom-year levels.
 The producer price index in 2010 increased by more than 10%. The main factors
behind this increase were rising prices of commodities and strong external demand.
So far, this has had little impact on consumer prices in the local market;
unfortunately, it is only a matter of time until the impact is felt.

Industrial production approaches pre-crisis After a 14.6% decline in 2009, industrial production
level recovered last year and is approaching the pre-
crisis level. Compared with 2009, industry grew by
Industrial production in emerging markets is already 6.6% in 2010, and manufacturing enjoyed a solid
some 15% above the pre-crisis levels reached in 8.2% growth.
2008. However in euro zone countries and the US it
is still around 5% below peak levels. Industrial Growth of manufacturing, excluding refined
production in Lithuania, as in the latter countries, is petroleum products, was even faster in 2010,
still below its peak level (in 2010 it was 9.8% below reaching 10%. The continued contraction of the
the level reached in 2008); however, it is supply of gas and electricity was slower (-5.7%)
approaching this level rapidly and should surpass it than in 2009 (-6.9%), and probably reflects higher
this year. energy efficiency in manufacturing and saving in
households. Furthermore, the biggest contraction in
Industrial production and manufacturing, 1Q 2005 – 4Q 2010 the supply of gas and electricity was recorded in the
(Left scale: index, 2005=100; Right scale: LTL million) second and third quarters (10% and 12.9%,
130 18,000 respectively) — the period when one of the largest
125 16,000 factories in the chemical industry stopped most of
120 14,000 its operations.
12,000
115 The growth of industry in the last quarter of 2010
10,000
110 accelerated to 16.5% after 7.8% and 4.6%
8,000
105
increases in the third and fourth quarters,
6,000
respectively. Manufacturing accelerated even faster
100 4,000
and in the last quarter was 21% higher than a year
95 2,000 ago. The fourth-quarter growth of manufacturing,
90 0 excluding refined petroleum products, was a bit
2005 2006 2007 2008 2009 2010 more modest and was 19.9% higher than a year
Ref ined petroleum products
Electricity , gas, steam and air conditioning supply ago.
Mining and quarry ing
Manuf acturing, except petroleum products
Manuf acturing, index (ls) Manufacturing growth to continue
Industry except construction, index (ls)
Source: Statistics Lithuania The performance of manufacturing in 2010,
although strong, was uneven. Production of paper
and paper products, pharmaceuticals, and chemical

Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000
E-mail: ek.sekr@swedbank.com www.swedbank.com
Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720
Nerijus Mačiulis + 370 5 258 2237. Lina Vrubliauskienė +370 5 258 2275. Ieva Vyšniauskaitė +370 5 258 2156.

Economic Research Department, Swedbank
Nr 01 • 31 January 2011
products exceeded or came close to previous
highs. Some sectors, however, are still well below
their best years – including manufactures of motor
vehicles, textiles, electrical equipment, and non-
metallic mineral products. The speed of decline in
2009 and recovery in 2010 depended on the
orientation of the producers: in general, export-
oriented sectors overperformed those that are
dependent on domestic demand.
Leading manufacturing sectors, 1Q 2005 – 3Q 2010
(Index, 2005=100)
260
240
220
200
180
160
140
120
100
80
2005 2006 2007 2008 2009
Paper and paper products
Chemical products
Pharmaceuticals
Source: Statistics Lithuania Machinery and equipment n.e.c.
Other manufacturing sectors, such as rubber and
plastic products, electrical equipment, wood
products, furniture, and wearing apparel, have
grown at paces similar or exceeding those of the
boom years; however, due to a steep decline in
2009, they are still below their peak levels. For
example, in the first three quarters of last year,
manufacturing of transport vehicles, trailers, and
semitrailers increased by more than 80% compared
with the same period of 2009. However, the jump is
mainly due to a very small comparative base.
One of the few sectors that continued to decline last
year was manufacturing of food products. Except
for manufacturing of refined petroleum products,
which makes up one-third of total manufacturing
(but depends on a single company), the food sector
is still the largest and makes up one-sixth of total
manufacturing. The growth of the latter sector was
muted due to weak domestic demand, on which it
heavily relies. However, producers of food and
beverages are slowly discovering new export
markets and becoming less dependent on local
consumers. Sometime in the not-too-distant future,
domestic demand for consumer staples will pick up
and provide a strong boost for the manufacturing
sector.
The Lithuanian Economy
Manufacturing sectors, 1Q 2005 – 3Q 2010
(Index, annual change, %)
160
140
120
100
80
60
40
2005 2006 2007 2008 2009 2010
Rubber and plastic products
Electrical equipment
Furniture
Food products
Source: Statistics Lithuania Wearing apparel
Lithuania does not (and should not) aspire to be
recognized among leading industrial countries, but
in a medium term growth of the economy will have
to rely on manufacturing, which is expected to
continue double digit growth in the first half of 2011.
2010
Producer prices reflect global
developments
After a16% spike in prices of industrial production in
December, average annual producer price inflation
in 2010 reached 10.3%. This is a significant
rebound after the 13.3% decline recorded in 2009.
Prices of oil, gas, and other commodities in
international markets are the main culprits, but a
strong pickup in demand for manufacturing
production also contributed to price increases. This
is reflected in the differences in product prices for
Lithuanian and foreign consumers. The average
annual increase in prices of industrial production
sold in the Lithuanian market edged up by 4.1%,
whereas prices of production sold in foreign
markets increased by 16.9%.
Producer prices of food products sold in Lithuania
declined by 0.3% (after declining by 4.6% in 2009),
whereas prices of food products sold in foreign
markets rose by 12.3%. Probably, this partly
reflects the different structure of products sold in
Lithuania and abroad (higher added value), but also
suggest that some of the price increases for local
consumers were postponed due to very weak
domestic demand. The same tendency is noticed in
other sectors; for example, last year prices of
rubber and plastic products in the local market
declined by 3.4% but went up by 5.7% in foreign
markets.
A different tendency is noticed in producer prices of
pharmaceuticals. Although these prices were
increasing in both 2009 and 2010 (8.4% and 11.2%,
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 The Lithuanian Economy

Economic Research Department, Swedbank

Nr 01 • 31 January 2011

respectively), the burden was heavier for local than electrical and equipment, and motor vehicles,
foreign consumers. Producer prices of producer prices were still declining in 2010. This
pharmaceutical products and preparations in the reflects a positive consequence of increased
Lithuanian market went up by 14.4% last year, productivity through lower labour costs.
compared with only a 5.5% price increase of
products sold in foreign markets. Rising Manufacturing and consumer prices, Jan 2005 – Dec 2010
pharmaceutical prices during the recession (Annual change, %)
confirms the theory that this sector is immune to (or 20
even enjoys) downturns. However the reasons
15
behind the differences in producer prices of
pharmaceuticals sold in Lithuania and abroad may 10
be a little more subtle. Since 2010, it has been
5
forbidden for doctors to indicate a specific brand of
medicine on prescriptions – only the active 0
chemical within it can be stated. This may have
-5
caused some consumers of pharmaceuticals to
switch to cheaper generics (which are more often -10
produced in Lithuania) and have created a
favourable environment for producers to increase -15
2005 2006 2007 2008 2009 2010
their prices.
Manuf acturing prices
Consumer prices, lagged 2 quarters
Prices of industrial production, Jan 2005 – Dec 2010 Source:Statistics Lithuania and Swedbank calculations
(Annual change, %)
40
The strong pickup in producer prices poses two
30 main threats. First, relatively more expensive
production is less competitive abroad and will cause
20 a slowdown in exports and manufacturing itself.
10
Even if competitiveness has not suffered so far,
sectors operating at close to full capacity and
0 experiencing some shortages of specific skilled
labour may start raising wages, which will place
-10
more upward pressure on prices and dent
-20 competitiveness. Second, higher producer prices in
the Lithuanian market are already starting to be
-30
reflected in rising consumer prices. This does not
2005 2006 2007 2008 2009 2010
Total market
bode well for lower-income households, which have
Lithuanian market not yet recovered from the hit on their disposable
Source: Statistics Lithuania Non Lithuanian market income.

Average annual inflation of manufacturing prices in

2010 was 11.3%, after a 15.8% decline in 2009. Not Nerijus Mačiulis
surprisingly, an above-average price increase was
recorded in manufacturing of refined petroleum
products, chemicals and chemical products, and
pharmaceuticals. However, in many sectors, such
as the manufacture of wearing apparel, machinery,

Swedbank
Economic Research Department
SE-105 34 Stockholm
Phone +46-8-5859 1028
ek.sekr@swedbank.com
www.swedbank.com
Legally responsible publisher
Cecilia Hermansson, +46-8-5859 7720.
Nerijus Mačiulis, +370 5 2582237.
Lina Vrubliauskienė, +370 5 268 4275.
Swedbank’s monthly newsletter The Lithuanian Economy is published as a service to our
customers. We believe that we have used reliable sources and methods in the preparation
of the analyses reported in this publication. However, we cannot guarantee the accuracy or
completeness of the report and cannot be held responsible for any error or omission in the
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losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’s
monthly newsletter The Lithuanian Economy.

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