Prompt adaptation by businesses to changed conditions, correct decisions by the Lithuanian government in containing the coronavirus outbreak and stimulating the economy, the finance sector’s resilience or simply fortune – this will long be a pertinent topic in seeking factors, which led to Lithuania’s economy seeing near the smallest contraction in the second quarter of this year in all of Europe, Tadas Povilauskas, SEB bank economist writes.
Of course, the Lithuanian GDP Q2 is now history and all attention is now focused on changes to the economy in autumn and the coming year, but based on changes during the past economic quarter in various EU countries, we can make predictions on what we can expect in the nearest quarters, especially if the number of infections in Lithuania spikes again and more stringent measures have to be returned for handling the spread of the virus.
Compared to Q1 of this year, Lithuania’s GDP in Q2 fell by 5.1% and was 3.7% lower year on year. This is so far the best result in the European Union, but only a little over ten countries have declared their data for Q2. The economies of the EU’s major countries such as Germany, Spain, Italy or France have seen declines of over 10%, while our neighbouring Latvia’s GDP fell by 7.5% over the quarter and was 9.6% lower year on year. From the results we already know, certain conclusions can be made on what led to the differing shifts in the EU’s economies. The factors indicated below must be viewed together rather than separately and answer to question why Lithuanian GDP in Q2 fell less than in most of Europe.
Handled epidemic crisis – lesser domestic consumption decrease
The better handled the epidemiological crisis in the country, the less the country’s economy declined. Faster containment of the coronavirus outbreak and softening or lifting of restrictions led to more opportunities for domestic consumption to recovery. An example – in spring, the coronavirus outbreak in the Baltic and Central European countries was contained faster than in the Southern European countries and respectively, the Baltic States and Central European economies began to rise from the bottom faster.
The influence of restrictions imposed in order to curtail the spread of the coronavirus demands more discussion. For example, back in April, it seemed that the Lithuanian economy would fall more than that of Latvia or Sweden because upon the declaration of lockdown, the restrictions imposed in Lithuania were far more stringent and we saw how retail sales in April fell far more in Lithuania than in Latvia or Sweden. However, expenses on goods are just a part of the expenses of a household. GDP shifts are no less influenced by export and investment changes and export, it seems, was the factor that helped the Lithuanian GDP decrease less than Latvia or Sweden’s (the latter saw a GDP contraction of 8.6% over the quarter). For example, Lithuanian service export fell by 15% in April and May, while in Latvia, the downturn exceeded 30%
The tourism sector drags down economies more dependent on it
The more a country depends on tourism, the greater the losses the economy faced in the second quarter. From among the large European countries, the Spanish economy fell the most and the influence of income from foreign tourism on the country’s GDP is the largest. That relatively few in Lithuania work in the accommodation, catering and passenger transport sectors has, for a time, turned into an advantage of our country. In our neighbouring Latvia, the influence of tourism is greater, thus making this country’s economic losses greater. Let us also not forget that unlike Latvia, Lithuania does not have a national airline such as Air Baltic whose losses had a negative impact on the Latvian economy. The small influence of tourism on the economy will continue to be an important factor, which will ensure that in Q3, annual GDP shifts in Lithuania will be better than in Southern European countries.
With this, we should also recall a simple truth – citizens who don’t spend money on services (in this case – travel) will not spend twice as much as usual on the same things next year. As for the postponed expenses on goods, especially long-term use ones, are usually akin to a spring. This is something we already saw in June when in most countries, retail sales were unusually higher than a year ago. In this, Lithuania was fortunate once again because sales of such goods as furniture rose rapidly in Europe and this immediately stimulated recovery in the furniture sector, which is one of the cornerstones of Lithuanian industry.
Declined car and investment goods production strikes the GDPs of Germany and the Visegrad states
The more a country’s industry is related to the car and machine manufacturing sector, the more its economy contracted in Q2. It is not difficult to remember that upon the coronavirus outbreak beginning, citizens and businesses immediately restricted their expenses on investment goods, thus companies producing them were the most hurt. Namely, this factor had a vastly negative impact on the economies of Germany and the Visegrad states in Q2: during this quarter, Germany manufactured 62% fewer cars and so it is no surprise that there was a drastic fall in Hungarian, Slovak or Czech manufacturing output. Thus, while the epidemiological crisis was handled well in the Czech Republic, the country’s economy fell by 8.4% in Q2 and was 10.7% smaller year on year.
In Lithuania, there are companies that work with European car and truck manufacturers, but their impact on the entirety of the industrial sector is not overly large. In the context of the coronavirus epidemic crisis, this became an advantage for Lithuania, but we shouldn’t forget that the problems of the automotive manufacturing sector will eventually end and we will once again complain about a lack of companies in this sector where both production efficiency and innovations are fairly significant. It could be that upon the coronavirus story ending, the levels of car sales worldwide will rise significantly for the coming few years and this will be an incentive for the entire sector’s development.
Downtime in the construction sector influenced the country’s economy
The more construction works were halted during the coronavirus outbreak in spring, the greater the blow on the country’s economy. That said, construction work changes in the EU differed mostly because the restrictions on business imposed in certain countries also impacted construction companies. Thus, in countries such as France and Italy, in April, construction company revenues were 60% lower than a year ago. In Lithuania, construction companies did not halt work in Q2 and it is likely that the downturn in construction works was minimal. The state sector has offered the construction sector aid not only in Lithuania but also in other countries, increasing financing for infrastructure projects and over the coming three years, construction companies that work with state procurements can expect significant benefits also from the approved EU economic recovery facility.
It is currently difficult to evaluate the government sector’s impact on reducing the level of the economic downturn in European Union countries over the second quarter while consolidated state sector finances have not been released. Thus, claiming that Lithuania’s fiscal response was more robust and had a greater impact on cushioning the economic downturn than other countries’ has no basis. Of course, there were numerous good decisions by the government sector and these helped provide aid to both citizens and businesses, but we can say with near certainty that the formula for greater success than other EU economies lies altogether elsewhere.
On the other hand, the state of Lithuania’s economy will depend namely on government decisions, how new coronavirus outbreaks are handled in the country. The fact that Lithuanian GDP Q2 losses were relatively low in the first half of the year will lead to Western and Southern European countries not catching up to Lithuania during the second half of the year in terms of GDP changes even upon considering that their quarterly GDP changes will be greater than Lithuania’s.
More on why Lithuanian GDP Q2 fell less