Intense price hikes ahead in another sector, warns: many people will feel the impact

Experts’ forecasts for the Lithuanian economy are far from optimistic. Economists say that rising inflation and Russia’s war in Ukraine will only further accelerate the rise in food prices and deglobalisation. The construction sector is no exception. According to Ekaterina Rojaka, economist and former Deputy Minister of Economy and Innovation, almost everybody will soon feel the increase in prices for services in this sector Andresa Repšytė writes in TV3.lt.

The sharp rise in the price of construction raw materials and the shortage of labour are leading to a deteriorating mood in the construction sector. All this signals higher prices for services in this sector, which may soon be felt by businesses and consumers alike.

“It is clear that construction managers are forecasting very clear price rises in the next three months. <…> This will affect both businesses and consumers.

Compared to the euro area average, we see that inflation in Lithuania is programmed to rise much faster and will probably have an impact for a longer period of time. This would mean that we would need to think very pragmatically about both the support aspects and our future action plans, ” says Rojaka.

Ongoing deglobalisation

 The Lithuanian economy and Lithuanian business depend heavily on the expert and on the economic environment. As a result, during the war in Ukraine, inflation is rising rapidly in Lithuania, as in other EU countries, the economist stressed.

“In April, economic forecasts shrank by about half and even more. The slowdown is obvious, and the macroeconomics of the war show that a domino effect is practically inevitable,” says Rojaka.

According to Rojaka, ongoing globalisation is very important in the Lithuanian business context, as global supply chains are under severe stress.

“Sectors such as construction, industry, all export-oriented sectors – they could be very stressed this year and in the future,” she said.

International institutions, she said, are recording the highest price increases in history. 

“It is not only Lithuania that has experienced a price shock. Many countries have. If we talk about the Harmonised Index of Consumer Prices, again, the Harmonised Index shows that we are in the lead. Other Baltic countries are very close to us. Inflation is practically twice as low in the euro area as a whole,” says Rojaka.

R. R. Rudzkis: “The situation is likely to change radically”  

Economic indicators are expected to deteriorate due to Russia’s war in Ukraine in the long term. The consequence of this is a rise in prices, which will be visible in almost all areas according to Professor Rimantas Rudzkis, an economist.

Last year was a good year for the Lithuanian economy, with good export performance, rising wages, an 11% increase in the budget, and even transport, which is now facing various obstacles, showed growth last year, Professor Rudzkis said.

“I think that the figures for the first quarter will still be good. Therefore, if we were to talk more deeply about the Lithuanian economy, we should not focus on what is happening now but rather on what will happen in the next one or two years because the situation is likely to change dramatically,” he said added. 

According to the latest data, inflation in Lithuania is close to 16%, while it is 7.5% in the eurozone.

However, this should not be attributed solely to Russia’s war in Ukraine. He notes that the price peak itself was already recorded at the end of last year. He cited the record high gas prices last autumn as an example.

“There are several reasons for this inflation. One is that the energy price cycle has started. It has been exacerbated by the European Union’s (EU) desire to move too quickly towards green energy. <…> Food prices are currently rising very fast around the world due to rising gas and fuel prices, among other reasons. Last year, the United Nations price index for 2018-2019 showed a 29% increase.

Currently, prices have risen by somewhere around 15% in three months. We can clearly see that those price rises will not stop because we are starting to cultivate the fields that require fertiliser and fuel.

Feed will continue to become more expensive, and cereals will become more expensive, which means that meat and milk will become more expensive. So we are not expecting inflation to go away any time soon,” he points out.

Outlook for Lithuania

So far, there are no signs of deteriorating economic indicators in Lithuania, apart from rising inflation. The main sector of the economy on which most export earnings depend, manufacturing, has been performing well for several years.

“This is a good first quarter of the year, so I think we will still see good macroeconomic indicators in the first quarter, i.e. we will also see a fairly good change in GDP. Moreover, as domestic trade is also growing, construction is not showing a downturn,” the professor said.

However, he says, industrial indicators will deteriorate as Russia’s war in Ukraine will inevitably affect many areas.

“Although Lithuania’s main market is the EU, there are some economic ties with Belarus and Russia, which I think will now be completely severed. In addition, of course, the industry will inevitably be affected by the increased costs of gas, electricity, etc. Therefore, in all likelihood, industrial development will worsen”, Rudzkis stressed.

The second most revenue-generating sector for Lithuania is the transport sector. Lithuania ranks first among EU countries in terms of transport’s contribution to GDP. Transport accounts for around 12-13% of value-added.

“There are much worse times ahead for transport. Firstly, because the EU is in a deteriorating state. Secondly, because the so-called ‘mobility package’ is now fully in force, which will severely hamper the ability of road transport to earn a living in Europe. Thirdly, the strong sanctions with Belarus and Russia that are now in force will severely affect the railways and airports,” confirms the professor.

Business expectations will also be significantly dampened, and he says: “Expectations will definitely go down, and this has already had an impact on builders. As far as I know, many builders are adjusting their plans – scrapping a whole series of expansion plans. Of course, this will affect the real estate market. <…> So the best of times is probably behind us.”