Izgorodinas. Lithuanian economy‘s downturn is less than expected, but the recovery will not be consistent

Aleksandras Izgorodinas
Aleksandras Izgorodinas

According to data from the Lithuanian Department of Statistics, over the second quarter of 2020, compared to the same period in 2019, Lithuania’s GDP shrank by 3.8%. Despite the fall in GDP, the second quarter wasn’t quite as bad for the Lithuanian economy as expected when it began – at the beginning of Q2, there were talks about the Lithuanian economy shrinking by double-digit figures, Aleksandras Izgorodinas warns.

Overall, this time, the crisis was very brief and we can distinguish two completely distinct periods in the second quarter:
1) April, when due to the lockdown regime, both sectors oriented toward foreign and domestic markets were suffering. Namely, the issues of April were the main reason for the fall in Lithuania’s GDP in Q2;
2) May and June, when Lithuania’s economy began displaying fairly sustainable signs of economic recovery.

In the second quarter, the greatest surprise was offered up by domestic consumption, where the downturn lasted only a month, namely April, when a 15% decrease in retail sales was recorded. However, the fairly stable situation in the Lithuanian labour market, lifted lockdown measures and rapid recovery in Lithuanian consumer expectations led to May and June recording respectively 3.6% and 5.9% annual retail sales growth and this was particularly boosted by growing expenses among Lithuanian consumers for non-essential goods.

For example, compared to June 2019, non-food goods sales in the retail sector grew by 11.2%; textile and clothing sales grew by an entire 12% year on year and telecommunications and cultural goods sales rose by almost 13%. What is also curious is that from the beginning of the lockdown, Lithuania has posted double-digit online retail sales growth: in Q2 this year, compared to the same period in 2019, online retail sales rose by 58% in Lithuania and rapid growth was also recorded in June (+50%) despite shopping centres reopening. Thus, COVID-19 has structurally changed the Lithuanian consumer market – for some consumers, shopping online has taken root and they have successfully migrated to online shopping.

The COVID-19 crisis lingered only quite briefly in the Lithuanian industrial sector as well – with the second quarter reaching its end, we could already perceive certain indicators of recovery in Lithuania’s industry. For example, in June this year, compared to the same period in 2019, Lithuanian industrial production rose by 1.1% already. It is likely that the jump in industrial production in June that Lithuania witnessed was mostly due to the component of new orders – data from the Lithuanian Department of Statistics shows that the manufacturing capacity usage level in Lithuanian industry rose from 67% in May to 70% in June. Furthermore, a manufacturer survey shows that in June, Lithuanian manufacturers evaluated more positively the state of demand in export markets. This coincides with increased economic activity across Europe and the improved situation in the Eurozone’s industries: Eurostat surveys in June recorded improved manufacturer expectations in 22 EU countries, including Lithuania’s most important export markets. It is likely that with the second quarter winding down, Lithuanian manufacturers received more export orders from other EU manufacturers.

The most negative surprise in Q2 this year was offered up by banking business loan indicators, which differ cardinally between Lithuania and the Eurozone. For example, data from the European Central Bank indicates that in June 2020, Lithuania was last in the entire Eurozone based on bank business loan dynamics. Compared to June 2019, the bank business loan portfolio fell 9% in Lithuania, while across the Eurozone, a 7.1% year on year increase was recorded. In Germany and France, the bank business loan portfolio rose year on year over May by respectively 5.8% and 11.5%, while in Spain, an 8.7% increase year on year was recorded.

It could be that such differences between bank business loan dynamics were based on more active bank participation in stimulus measures in other Eurozone states, but it could also be that significant caution amongst Lithuanian banks and an unwillingness to take risks had an impact. In either case, with the Lithuanian economy recovering, traditional financing will for a time yet be difficult to access for Lithuanian businesses. Companies will have to finance their growth from either their own savings or via alternative financing.

To sum up, this time the crisis lasted only very briefly in Lithuania and with the second quarter nearing its end, signs of recovery were observed in both sectors oriented toward the domestic market (retail sales) and in sectors oriented toward exports (industry). However, despite these positive signs, I currently do not predict a rapid V-shaped recovery scenario for Lithuania. I believe that Lithuania’s economic recovery will be more akin to a W shape. For example, the recent growth in negative reports about the worsening COVID-19 situation in Lithuania and the world could once again adjust Lithuanian consumer expectations downward, with these having quite severely worsened during the first wave of the virus. Worsened consumer expectations could cut into consumption appetites and worsen consumption indicators for non-essential goods and services in Lithuania, thus worsening overall retail sales statistics.

An analogous risk could also slow Lithuanian industrial recovery, which has just begun. Increasing concern over growing COVID-19 infection rates across Europe could once again worsen EU consumer expectations, which would encourage EU consumers to reduce the consumption of non-essential goods. Slowed consumption in Europe would respectively negatively impact production indicators in Europe and Lithuania, where production is strongly linked to the pace of Europe’s industry.

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