The year 2017: will growth in Lithuania be below its potential?

As its key priorities for 2017, the European Commission has indicated creating more jobs and ensuring better growth and investments. It has urged the states to create a promising economic future for all, to protect our living, and to provide better opportunities for the youth. Priority actions should be based on an economic policy strategy of a value triangle that consists of investment, structural reforms, and responsible management of public finance.

In this insight, I will present certain comparative cross-sections of the economic and social life in Lithuania and the EU to help us form a more adequate understanding of where our society is and where it will be going in the foreseeable future, as well as of what the government and each and every one of us can do to make living in Lithuania safer and better. It will contain more figures than analysis thereof, yet often figures are far more eloquent than those who interpret them.

Economic parameters: foreign direct investments, government debt, the level of deficit in the government sector. 

The EU economy is growing moderately again and is predicted to maintain its upward momentum in the coming years. The EU’s GDP is larger than it was before the crisis, however the GDP and efficiency growth indicators are still below the potential, and the volumes of investment are lower than the pre-crisis level. 

• Foreign direct investments:

[2] The calculations were based on the population of Lithuania as of 1 January 2016, which was 2.9 million.

The government debt is very large in some EU states: the debt of seven Eurozone countries (France, Spain, Belgium, Cyprus, Portugal, Italy, and Greece) stands at or above 100 per cent of the GDP. Lithuania’s debt amounts to nearly 40 per cent of its GDP.

/Legend: Lithuanian government debt in 2008–2015; EUR bn. (scale on the left); % of GDP (scale on the right)/

• The level of deficit in the government sector 

The level of deficit in the EU government sector in the Eurozone over several years has shrunk from 6 per cent of the GDP average to quite below 2 per cent this year and is expected to continue to decline.

According to Eurostat, the level of deficit in the Lithuanian government sector has been decreasing since 2011. In 2011, it stood at 8.9 per cent of the GDP, in 2015, at 0.2 per cent of the same and was the lowest among all Member States that kept records of this indicator. In 2016, the government sector deficit is believed to amount to 0.8 per cent of the GDP. 

Social parameters: the unemployment rate, the employment rate, population, population ageing, economic inequality, inequality. 

• The unemployment rate in the EU has been consistently decreasing and reached 8.6 per cent in September – the lowest since 2009. Unemployment still remains rather too high in many European states, and the prolonged period of excessive unemployment has caused major social damage to a lot of the Member States. In Lithuania, the unemployment rate was 7.1 per cent in 2014, 6.1 per cent in 2015, and 8.8 per cent in the 2^nd quarter of 2016. 
• The employment rate in the age group of 20–64 in the EU is 71.1 per cent[1] and has breached the 2008 level for the first time. In Lithuania, the employment rate among population aged 20–64 is rising gradually, going up from 73.3 per cent in 2015[2] to 75.7 per cent in the 3^rd quarter of 2016 (Lithuanian Statistics). 

• The population of the 28 European Union states on 1 January 2016 was 510.1 million (up by 1.8 mn. from the year before). In 2014 alone, the European Union’s population increased by 1.3 mn. The year 2015 was the first since 1961 when the number of population in EU 28 decreased naturally. Between 1960 and 2016, the number of population in EU 28 grew by 1.34 mn. (from 406.7 mn. to 510.1 mn.).As of 1 January 2016, the population of different Member States ranged from 0.4 mn. in Malta to 82.2 mn. in Germany, and the population of Germany, France, the UK, and Italy combined amounted to more than one-half (53.8 per cent) of the EU’s total population.

Population dynamics have varied from one Member State to another. The number of population has grown in 17 states and dropped in 11. Luxembourg, Austria, Germany, Malta, and Sweden have reported the highest rate of population growth, standing at 10 new residents per population 1,000, which is almost 3 times above the EU average of 3.5 new residents per population 1,000. The biggest increment in population has been recorded in Luxembourg (23.3 new residents per population 1,000), the biggest drop in Lithuania (-11.3 per population 1,000), Latvia (-8.7), and Croatia (-8.2). 

• Population ageing poses a threat to the financial sustainability and adequacy of social security systems.

• Economic inequality: the ratio between the 20 per cent (the rich) and the bottom 20 per cent of the population (the poor): 

Lithuania currently has what seems to be the highest level of economic inequality across the European Union. 

• Inequality. According to Eurostat, the GINI index reflecting the overall extent of economic inequality, where 0 signifies total equality and 100 total inequality, in 2015 was 37.9 for Lithuania. Over the past decade, the index has been subject to slight variations, going up in the wake of the global financial crisis in 2008, dropping between 2010 and 2012, and then continuing an upwards trend later on. Nonetheless, it has been much higher than the EU average during the entire period.

/Legend: GINI index in Europe in 2015; Iceland, Slovakia, Norway, Slovenia, Czech Republic, Finland, Sweden, Belgium, The Netherlands, Austria, Denmark, Malta, Hungary, Luxembourg, France, Switzerland, Germany, Croatia, Poland, Ireland, EU average, Italy, UK, Cyprus, Portugal, Greece, Spain, Estonia, Macedonia, Latvia, Bulgaria, Romania, Lithuania, Serbia/ 

The high degree of economic inequality undermines economic efficiency and any potential it may have for sustained growth. Huge, continued inequality leads to concern about equity. As often as not, it reflects a high risk of poverty and social isolation. Inequality has its negative effect on the economy as well, because it prevents efficient use of the human capital.

The European Commission 2017 forecast for Lithuania

Just like with some other EU Member States, education, labour market, and social security institutions in Lithuania do not have an inadequate structure to ensure their function, which is to investment into human capital and seek to achieve the right outcomes. These institutions do not help set off unequal opportunities and contribute to increasing the economic inequality. 

Lithuania is still not through with its structural reforms and any recommendations that may be made to it are being brought to life in a fragmented manner all too often. Modernisation of product, service, and labour markets should remain a priority.

By Linas Sesickas, Partner at Law Firm GLIMSTEDT