Economist Mačiulis tells us how Lithuanians will live soon: here’s what it will look like

Central banks are trying to correct their mistakes, and this time they have chosen a destructive path to curb inflation, said Nerijus Mačiulis, Chief Economist at Swedbank. However, not everyone will experience difficulties – some may lose their jobs, but others will continue to have fun, spend money and buy property abroad.

The destructive path chosen

Central banks have been the subject of a lot of criticism lately, but according to Mačiulis, it is well deserved: “If we look at the past, we can see that the same path is being followed.

If we look at the past, central banks always go too far in one direction or the other. They overdid it during the pandemic by lowering interest rates and distributing money, which contributed to inflation. Now they are overreacting by correcting their mistakes and causing a recession, and next year they will correct their mistakes again by cutting interest rates.”

As he explained, the central bank’s interest rate increases and money supply regulation affect the economy, but people’s preferences and actions, such as whether or not to buy a house, invest, save or not save, change only after a delay of a year or year and a half. This cannot be changed quickly, even if the banks want to do so.

“But now many economists would say that central banks are doing nonsense – they are fighting something they cannot influence,” Mačiulis said on Žinių Radijas’ Persona Grata programme.

The current inflation is linked to the rise in energy prices last year, the increase in raw material prices, the disruption of supplies from Ukraine and Russia, the redistribution of supply chains, and China’s coronavirus management policy. The economist said that the banks cannot solve any of these problems, so they have decided to affect inflation by creating a recession.

“They have suppressed the price of money to the point where we will see insolvencies, bankruptcies somewhere, unemployment will rise, people’s expectations will deteriorate, workers will no longer need to raise their wages, and then there will be no inflation.

But what is that? It is reducing inflation by crushing demand across the board. Such a path towards lower inflation is destructive and will destroy jobs,” Mačiulis explained.

“Recession is not a crisis”

The economist also reassures that not all citizens are feeling the economic slowdown now, and not all will feel the decline in Lithuania’s gross domestic product later.

“A recession is not a crisis. A recession can be localised, as it is now.

The added value of some industrial, oil refining, fertiliser production or other enterprises linked to the prices of energy resources has decreased. Wood, furniture and metals are now slightly less produced.

But these are localised problems. For example, tour operators send 6 full planes of travellers a day to Turkey, and how many more fly to Egypt? Tour operators do not see any crisis”, said the expert.

However, he acknowledged that for some people, this period might be a bit more difficult and that some might lose their jobs, although it should not take long to find a new one, as some companies are still constantly facing a shortage of workers.

Other indicators also show the different situations of the population. For example, food retail sales in the first months of this year are 7.5% lower than at the same time last year, while the population is now about 50 000 more. This means, as Mačiulis said, that some people are looking to reduce their consumption, eat less, buy cheaper or discounted products, and shop in neighbouring countries.

However, in the same period, sales in restaurants and bars have increased by more than a tenth. So while some are saving and tightening their belts, others are having fun, enjoying life and spending money on non-essential goods and services.

Housing abroad

Some are even buying property in foreign countries such as Turkey.

“I don’t own an apartment in Turkey myself and have never thought about it. I have been on holiday twice in Turkey, on the Antalya coast. It is popular for Lithuanians to buy property abroad, but I would never buy an apartment there.

Being in Antalya made me feel like I was in Russia, even though I have never been there, and I don’t plan to go there. But everything there is written in Russian, the signs are Russian, and the staff in the shops and hotels speak only Russian.

I don’t want to be absolutist, but let’s face it. There are many Russians in southern Russia who have limited access to the European Union (EU), so they are holidaying in Turkey,” said Mačiulis.

But not only has he never considered a home abroad, he has never even considered a second home, even on the Lithuanian seaside or by a lake. In general, he thinks housing on the Lithuanian seaside is overvalued, as it is priced similarly to property in Costa Brava or Tenerife (Spain).

According to Mačiulis, there are several types of home buyers. One of them is the one who does not count money and buys a second home at the Lithuanian seaside or even not in Lithuania.

“They can afford to go on holiday for two or three months of the year and live outside of Vilnius and Kaunas or perhaps spend the winter in Tenerife. Such investors don’t even calculate the return on investment. They want to own their own home and spend time in a warmer country,” the economist said.

The second group of people are those who buy a home with the idea of spending two or three weeks a year in it and renting the rest of the time. You might even be able to get a return of 7-8% a year, which is a decent amount.

There are also people who buy a house, stay for a few weeks and then spend the rest of the time empty and unused. It’s not worth the money to make such an investment; renting a holiday home is cheaper.

“That’s why I always rent a holiday home. It’s not that I don’t buy another property because I don’t want to blow it, I might be able to rearrange my cash flow and investments and buy that property, but there are several reasons – I want to see different parts of the world on holiday, and it’s a lot cheaper for me to rent than to buy a property, the return on rent is not enough and owning a property on one or another coastline wouldn’t make me any happier,” said Mačiulis.

Moreover, according to him, there are easier ways to get a 7-8% return.

“For example, there are crowdfunding platforms, and you can buy bonds from trustworthy companies, and then you don’t have to worry about renting, repainting wallpaper, or taking care of broken furniture. In my opinion, renting is a huge job”, said the economist.