By Violeta Klyviene - Danske Bank

Today Lithuanian Statistics published the flash estimate of GDP growth for Q1 11. GDP unexpectedly accelerated to 6.9% y/y, significantly up from 4.8% y/y in Q4 10, seasonally-adjusted GDP increased by 3.5% q/q. The outcome was significantly higher than our and consensus forecast (5.1% y/y).

Details
Lithuanian GDP increased by 6.9% y/y in Q1 11, significantly up from 4.8% y/y in Q4 10. We expect the Lithuanian economy to grow by 4% y/y in 2011, but there is a clear upside risk to our forecast.

Assessment and outlook
The Lithuanian GDP outcome in Q1 11 was significantly higher than our and consensus forecast (5.1% y/y). Although detailed statistics have not been published yet, it looks like the Lithuanian recovery has become more broad based and was derived not only by robust export performance, but also by notable growth in private consumption. However, the impressive recovery was partially determined by the low base effect.

Regarding this year’s development we emphasise that growth might exceed our expectation (4% on average). However, Lithuanian quarterly national accounts data are characterised by significant corrections, so we are not changing our forecasts for this year until the publication of the final data for Q1 11.

The biggest risk to the economic recovery is still associated with the accelerated inflation, which is mainly determined by external factors and as a consequence cannot be handled effectively. Eurozone debt crisis risk remains relevant as well. Under the unfavourable scenario, Lithuanian will be unable to escape the negative effects of a full-scale sovereign debt crisis, but the economy fundamentally looks much stronger than a few years ago.

Otherwise such risk confirms the need to pursue fiscal consolidation targets in the medium term.