Analysis: recovery of Lithuanian economy continues

13.08.2012, 13:01

Lithuania banking sector is seeing sustainable growth throughout the first half of this year. New home loan rates shrank by 0.7 percent points and are now down to 3.1%, which is the lowest since the collection of data began in October 2004, writes The Lithuanian Tribune. 

Inflation in June of 2012 compared to June 2011 is 2.9 percent, while last July’s inflation was 4.6 compared to the previous year.

It seems Lithuanian households are recovering well after the latest financial crisis. In the first half of 2012, bank deposits consistently continue to grow mounting up by 921 million (2.1%) up to 44.1 billion Litas. According to the Central Bank of Lithuania, this growth is mainly due to a strong increase in household deposits.
Vitas Vasiliauskas, Head of the Central Bank of Lithuania, explains that “For the first time, in the second quarter, deposit amounts of households and private enterprises exceeded the amount that existed before SNORAS bank was suspended. This shows there is a strong and growing confidence in the country’s financial system as well as increased opportunities for the private sector to save.”
With more money in the bank, households are quicker on returning their loans. A clear sign of this is that the total home loan portfolio shrank by 1 percent, to 19.37 billion Litas. Moreover, households are also keener on new house loans. While home loan interest rates were record high in October of 2008, namely 6.47%, they are now a mere 3.1 percent on average.
As Mr. Vasiliauskas sees it: “The households still remain cautious and are in no rush to make any decisions on investing borrowed funds. However, with the prices staying flat for more than two years, the number of property transactions has increased somewhat.” SEB bank claims the number of housing loans it issued this year increased by nearly 10 percent compared to the same period last year. What is more, the consumers expect property prices to decline even further. According to SEB Bank, around 20% of their surveyed households hope the housing prices will fall.
Inflation, on the other hand, was at first expected to be deflation. Yet many analysts were contradicted in their forecasts, as consumer prices slightly rose. Vilija Tauraitė, chief analyst at SEB bank, told BNS that “The seasonal factor was less favorable than we expected and did not drive inflation in the negative zone.” Being a small, open economy, it is the external factors that mostly affect Lithuania’s inflation rate. While domestic consumption was stable inside the country, the prices were mostly affected by the increase in natural gas prices on July 1st.
Mindaugas Jurgelis, analyst at DNB Markets, expects these prices to continue to push the inflation rate: “Lower inflation could hardly be expected in the country in other months. It will mostly be affected by changes in commodities’ prices. The prices of grain have been growing fast in recent months due to dry weather in Russia, Ukraine and Kazakhstan. The prices of crude oil are more likely to grow than to fall during the months to come since the difficulties in the world’s largest economies, such as the US, the euro zone and China, should trigger stronger response from the governments, which would drive the prices of commodities higher.”
Although Lithuania has had many good news regarding its economy for its households, there are still warnings of a second financial crisis around the corner. It is therefore the consumer’s choice to decide, whether it is wise to take out a loan now.