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. Last Updated: 07/27/2016

Russia-Induced Recession Plagues Lithuania

VILNIUS, Lithuania -- A Russia-induced recession continued to plague Lithuania's economy in the second quarter, dampening hopes for a significant upturn by the end of the year, analysts say.

The statistics department said Tuesday that gross domestic product contracted 4 percent in the second quarter year-on-year.

Lithuanian GDP contracted 5.7 percent in the first quarter of the year forcing officials to scale down full-year expectations to 0.3 percent growth and leading to a 450 million litas ($112 million) budget austerity package.

Analysts had expected the 4 percent decline in second quarter GDP - compared to a 10.4 percent rise in the same period a year ago - with the economy still sluggish due to the lingering effects of Russia's financial crisis last summer.

The central bank's estimates released last month showed the economy had contracted by about 3 percent, year-on-year, in the second quarter of the year.

"If the figures for the second quarter of last year are not revised, the contraction will be 4 percent to 5 percent; if they do revise last year, the figure will show about a 3 percent drop," local economy expert Margarita Starkevichiute said Monday.

"To my mind, government spending was not fully reflected throughout last year, pushing last year's second quarter figure too high," Starkevichiute added.

Analysts said the effects will remain a problem for the entire year with the economy expected to shrink around 1 percent in 1999 after a 5.1 percent rise in 1998.

Equity traders said a contraction had already been built into prices, but the market was jittery as worse then expected figures might have soured investor sentiment if the data was no better than the surprisingly large first quarter fall.

"If the numbers are worse than 5 percent that would push the market lower and interest rates higher," Hansabank Markets analyst Maris Lauri said Monday.

Lithuania's foreign trade, seen as the most dependent among the three Baltic states on Russia, was hit hard by last year's ruble devaluation, which cut the entire region off from its mainstay export market.

Lithuanian exports fell 23.8 percent in the first seven months this year as sales to former top trade partner Russia plummeted, taking economic growth with them. Total imports dropped 20 percent as domestic demand slumped.

Exports grew 3 percent in July, and the European Union took 49.9 percent of exports in the first seven months of the year, signs welcomed as heralding an economy uptick.

But analysts say the painful process of reorienting exports to the more stable markets in the West has been slow.

"I would expect some pick up in the second half of the year, but that will not put the economy to growth in terms of full-year figures," Lauri added.

The data will also provide a full picture for the swelling current account deficit, which rose 29.6 percent, year-on-year, in the second quarter of the year to $378.8 million.

Analysts estimated the gap to be at a worrying 14 percent to 15 percent of GDP, which could fuel worries over whether the litas currency is sustainable over the longer term amid news that the nation's fiscal deficit reached 5.8 percent of GDP.

"They need to put their fiscal finances in order," Merita Securities analyst Mika Erkkila said.