Lithuanian economy slows on weakening domestic demand

Lithuania”s economy expanded in the third quarter of 2008 at the slowest pace in nine years as domestic demand weakened after bank lending froze. Annual growth eased to a preliminary 3.1% from 5.2% in the previous quarter, the Statistical Department of Lithuania said in an e-mailed statement today.

The median estimate of five economists in Bloomberg survey was 3%. An economic boom sparked by entry into the European Union in 2004 ended after accelerating inflation curbed consumer buying power. Credit growth, real estate prices and domestic spending, key drivers of the expansion, are slowing. Increasing risk of a global recession also threatens to curb growth as demand wanes in export markets, reports ELTA.

“The forecasted slowdown has come,”" said Rimantas Ruckis, chief economist at Vilnius DnB Nord Bankas. “Domestic demand had been driven by strong credit growth and it didn”t correspond to reality,” added Ruckis.

Growth in the third quarter was driven by a good harvest and rising output at oil refinery Mazeikiu Nafta, the country”s biggest company, economists said. The outlook for exports is “worrying”" and a potential drop in consumption further raises the risk of a recession next year, according to analysts. “In reality, the outlook is even weaker, as the recovery of the oil refining capacity raises the growth figures of manufacturing output artificially,”" said Anssi Rantala, a senior analyst with Helsinki-based Nordea Markets. Growth averaged 5% through the first nine months this year, the Statistical Department said. The central bank estimates that growth may average 4.2% this year before slowing to 1.2% in 2009. “The slowing of the economy is occurring more suddenly, and will be deeper than expected,”" the Bank of Lithuania stated on October 23. “This is fundamentally based on worsening expectations by people and businesses about economic developments amid the global financial crisis.”" Lithuania”s economy continued to grow in the third quarter while its Baltic neighbors, Latvia and Estonia, slipped into recession in the second quarter. Domestic consumption is likely to weaken further in coming quarter as inflation, which accelerated to 11% in September, cuts consumers” buying power, the central bank said. Retail sales fell 3.3% in August, suggesting that consumption is weakening on tumbling consumer confidence. The rate compares with 27.1% growth in February.