Lithuania faces Europe's worst recession

(VILNIUS) - Lithuania faces the steepest recession in the European Union this year as the Baltic state's economy is set to contract by 19.3 percent, new data from the central bank showed on Thursday.

The result would be the economy's worst contraction since 1992 when the economy shrank by 21.26 percent during the painful industrial collapse that followed its declaration of independence from a crumbling Soviet Union.

The central bank has repeatedly revised downwards its predictions as the extent of Lithuania's economic crisis becomes ever clearer and said recent data showed output would fall by more than the 15.6 percent it predicted in May.

In January, the central bank said the economy would contract by 4.9 percent.

Neighbouring Latvia, which was hit by the crisis months earlier, is expecting its economy to shrink by 18.0 percent and Estonia estimates its economy could contract by 15.3 percent this year.

Preliminary data released last month showed that the Lithuanian economy shrank by 22.4 percent in the second quarter of this year compared with a year earlier -- its worst performance since comparable records began in 1995.

Lithuanian authorities have blamed the dramatic contraction on the continuing slide in industrial output and retail sales.

The central bank said Lithuania would remain locked in recession in 2010, when the economy was expected to shrink by 5.2 percent compared with this year.

Lithuania, which declared independence from the crumbling Soviet bloc in 1990, enjoyed a reputation as a fast-growing economic "tiger," notably since joining the European Union in 2004.

The economy of this country of 3.3 million people grew by a record 8.9 percent in 2007 after expanding 7.8 percent in 2006.

But growth slowed to 3.0 percent in 2008 as domestic demand withered in the face of rampant inflation and the deepening global crisis took its toll.

The worsening slump is dampening prices. The central bank said annual average inflation was likely to be 3.9 percent by the end of this year and that the country could see 2.0 percent deflation in 2010.

Deflation -- a sustained drop in prices -- is seen as bad for an economy since it can curb activity further by causing consumers and companies to hold back on spending as they wait for even better deals.

In the face of the crisis, the Lithuanian government has raised value-added tax and slashed spending, including public-sector pay, and the private sector has followed suit.

Overall salaries are likely to fall 9.8 percent this year and 8.1 percent in 2010, the bank said. Unemployment, currently 9.7 percent, could climb to 15.7 percent this year and 19.3 percent in 2010.

Both factors could dent domestic demand further still, the bank has warned.

Lithuania has so far declined to follow Latvia and other Eastern Europe economies in seeking a bailout from the International Monetary Fund and the EU.

Lithuanian President Dalia Grybauskaite, however, has suggested that her country could be forced to seek help if it fails in a bid to raise more money from foreign capital markets to prop up its teetering economy.