By Violeta Klyviene  - Danske Bank A/S 

In the following, we present an updated outlook for the Lithuanian economy, given the latest economic releases for May and June. 

In the first quarter of this year, Lithuania demonstrated an impressive recovery: GDP growth accelerated to 6.9% y/y in Q1 11, up from 4.8% y/y in Q4 10. In Q4, the Lithuanian economy was supported by a more notable recovery in domestic demand: final consumption expenditure grew by 4.5% y/y and fixed investment by 41% y/y. The recovery in private consumption is likely to accelerate this year, basically due to a relatively favourable fiscal policy stance. We now expect the Lithuanian economy to grow by 5.8% y/y in 2011E and 4.9% in 2012E. 

Lithuanian CPI inflation continued to accelerate, mainly due to a rise in food prices. So far, we see no strong inflationary pressure from the domestic demand side. However, private consumption is growing faster than we predicted and there is a risk that domestic pressure on core inflation could intensify over the second half of this year. We now expect Lithuanian average inflation of 4.7% y/y for 2011 and 3.6% y/y in 2011.

The current account remains in small surplus in 2011, but over the medium term it would swing into a deficit as the trade balance deteriorates further. We forecast that the deficit will remain at a manageable level, but such a trend indicates that competitiveness issues remain relevant.