Bank of Lithuania: we are witnessing a turning point

Happy life. By Tabreez from Unsplash

Lithuanians are the least likely to feel inflationary pressures and interest rate increases and the most confident that salaries will rise in the coming years, according to a survey initiated by Citadele Bank in the Baltic States. The survey shows that people are actively planning trips and large purchases but are turning away from restaurants when they are affected by high prices. For the latter, this could mean bankruptcy, Vestina Gustytė states in lrytas. lt

No luck for neighbouring Estonians

The study reveals significant differences between the Baltic States, with Lithuania emerging as the leading country. Most Lithuanians – 41% – do not feel inflation pressure on their purchasing power. Compared to Estonia and Latvia, rising prices have reduced the financial possibilities of the smallest share of the population – 31% in Lithuania, 39% in Latvia and 53% in Estonia.

According to Aleksandras Izgorodinas, an economist at Citadele Bank, this difference in opinion between the neighbouring countries is due to Lithuania’s leadership. According to the European Commission, in June, Lithuania had the best opinion of the population about their finances since March 2007.

“Wages have been rising faster than prices for some time, so the impact of inflation on people’s purchasing power has recently diminished. The financial outlook of the Lithuanian population has been good for quite some time now, with more and more of the population seeing and believing that their economic situation is improving.

Estonia, on the other hand, stands out, both in our surveys and in European Commission indicators. Estonia has the worst perception of financial prospects among the Baltic States. Estonia, which has the weakest economic cycle, feels the most excellent inflationary pressure in the Baltic region,” says Izgorodinas.

Lithuanians have a reason for optimism

Most respondents in each of the Baltic countries say that their finances have not been affected by the still high interest rates on loans—the highest share of respondents was in Latvia (53%), 52% in Lithuania, and 47% in Estonia.

“Estonia has the lowest proportion of people who have not been affected by interest rates, but also the highest proportion of people whose finances have been significantly affected by the European Central Bank’s (ECB’s) interest rate hikes from 2022 onwards – as much as 28%, compared with 19% in Lithuania and 16% in Latvia.

This is due to Estonia having the highest level of household indebtedness in the Baltic region. The ratio of household loan liabilities to gross domestic product in Estonia is 35%, compared to only 17% in Latvia and 22% in Lithuania,” comments Rūta Ežerskienė, Member of the Board of Citadele Bank, responsible for retail banking in the Baltics.

The Lithuanian population is the most optimistic about salary growth. 31% of respondents believe their salaries will increase over the next 12 months, compared to 28% in Latvia and 23% in Estonia. Even 8% of Estonians surveyed believe that wages will decrease.

According to Ms Ežerskienė, the optimism of the Lithuanian population about wages is influenced by the country’s strengthening economic cycle, especially in labour-intensive sectors such as industry, retail trade and transport.

Plans of owning homes and travelling

Lithuanians can and want to afford more – Citadele’s research confirms these findings.

The majority of Lithuanian respondents (47%) who intend to spend money on major purchases in the next 12 months highlighted plans for home repairs and new household appliances, as well as travel (32%).

“Almost a tenth (7%) of the Lithuanian population surveyed intend to buy a home. Likely, the recovering purchasing power and expectations of further cuts in base rates in the euro area may soon spur activity in the Lithuanian real estate (NT) market.

Moreover, the Bank of Lithuania’s data show an interesting trend – we are finally seeing a breakthrough in Lithuania’s housing loan statistics. In the housing loans segment, the 12-month moving average of real new loans in May was the highest since December 2023, while the annual rate of decline in the volume of new housing loans was the lowest since autumn 2023. Thus, official data also show that the peak of passivity in the Lithuanian housing loan market has passed, and it seems that the population is more actively interested in purchasing real estate and borrowing more actively for housing,” says Ežerskienė.

She highlights the trend that among residents who intend to increase their spending on major purchases, more than 75% intend to finance these expenses from their own savings—even young people plan to do so.

However, while most people plan to make large purchases out of their savings, 58% of Lithuanians surveyed could live without additional financial resources for up to half a year. 19% of Lithuanians would have more than that for more than six months. This is the highest proportion in the Baltics, with 15% of Estonians and Latvians expecting to live without additional financial resources for that long.

The gloomiest forecasts are for restaurants

According to Ežerskienė, several consumer segments will soon start to show signs of recovery. One of these categories is the home repair and household appliances segment.

“In June, the intentions of the Lithuanian population to spend money on large purchases were the highest since December 2021.

Due to decreased interest rates, Lithuanian residents will spend the extra money on travel, home repairs and household appliances,” adds Ežerskienė.

At the same time, Izgorodinas says that the recovery of the population’s purchasing power has reached a level where less attention is paid to savings. Some people are planning to increase their spending on non-essential food purchases, i.e., more expensive products that they could do without. This recovery in consumption is highly unusual.

“The recovery in food consumption is not only linked to the recovery in the population’s purchasing power but also to the recent sharp decline in the turnover of Lithuanian restaurants and cafés. The recovery in food consumption will kill the turnover of restaurants,” comments the economist.

Restaurant turnover has fallen 11% year-on-year and 8.6% for 2024. According to Izgorodinas, rising restaurant prices likely have a psychological effect on consumers, encouraging them to cut back on spending in restaurants and cafés and eat out more often. However, the economist is hesitant to make such a prediction that restaurant prices could fall.

“I disagree that the rise in restaurant prices is linked to the increase in value-added tax. It is wage increases that have a significant impact. As Lithuania’s economic recovery strengthens, we will likely see an increasingly acute shortage of workers, which will also affect the restaurant and café segment.

Will there be more bankruptcy cases? Yes, there will be more bankruptcy cases. The risk area is mid-range restaurants. There will be a Hunger Games period in the market when the strongest will survive,” Izgorodinas shared his forecasts.

You may like

Be the first to comment

Leave a Reply

Your email address will not be published.