Mačiulis: Lithuania has been able to avoid shock and so the economy will contract the least

The coronavirus crisis has struck a major blow to the global economy. However, Lithuania’s economy was almost able to avoid economic shock, with the country posting among the smallest declines in its economy among all EU member states, Enrika Gecaitė writes in tv3.lt

According to data from Eurostat, the Lithuanian economy’s decline for the second quarter of this year was the smallest among the ten EU countries to already declare their data.

Lithuania’s GDP contracted 5.1% between April and June, compared to the first three months of this year. The year on year decrease, compared to the same period in 2019, was 3.7%.

During a Tuesday economy overview at Swedbank, economist Nerijus Mačiulis discussed what led to the Lithuanian economy almost being able to avoid economic shock and what future scenarios are now most likely, as well as what challenges still await.

Swedbank economists have increased their forecasted global GDP growth for this year and predict that rapid worldwide economic growth will continue for the coming two years. Lithuanian economic prospects are also viewed more positively – it is predicted that this year, Lithuania’s GDP will contract the least in the Eurozone, only by 1.7%.

Swedbank chief economist in Lithuania N. Mačiulis highlights that in preparing the newest forecasts, several important assumptions were evaluated.

“Firstly, we believe that even with repeated virus waves, they will be smaller and less impactful on economic activity. Secondly, vaccinations or medicines will be available for broad use in the first half of 2021 or the virus’ spread will settle down naturally. And finally, despite the reduced threat of the virus and likely rapid economic recovery, governments and central banks will continue implementing various economic stimulus measures,” N. Mačiulis says.

The economic trough is already in the past

While China faced a record downturn in Q1 this year, recovery has been rapid and already by the middle of the year, the country’s GDP exceeded levels seen at the end of last year. However, Swedbank economists note that not all economies around the world will be able to celebrate such rapid recovery. Countries, which depend on tourism and have limited financial opportunities to resolve short-term economic problems, remain especially vulnerable.

“The Eurozone’s economy should contract around 8% this year and the greatest blow will be endured by the countries that suffered the most from the virus and are dependent on tourism – Spain, Italy and France. Nevertheless, the ECB’s monetary policy, the European Commission’s support plan and the fiscal stimulus from national governments will lead to fairly rapid recovery in the region’s economies – already next year, the Eurozone’s GDP should grow by 6 per cent,” the Swedbank chief economist predicts.

No massive coronavirus impact

Despite how in many countries, new waves of the virus’ spread are being recorded, Swedbank economists predict that they will not lead to the sort of negative economic consequences seen in spring this year.

“Beyond the virus, which could suppress expectations and desire to invest and consume, there are also other problems, which were side-lined this year, left a little forgotten, but never disappeared. US-Chinese diplomatic and economic relations remain very tense and a trade conflict could grow more heated at any moment.

Furthermore, over the coming few years, most developed states could face the challenge of stagflation – protectionism, nationalism and other problems will suppress the growth of productivity and economies in general, while funds printed by central banks and generously doled out by government could lead to increased inflation,” N. Mačiulis listed expected challenges.

Smallest downturn in the EU predicted

Over the first half of this year, compared to the same period last year, the Lithuanian economy has contracted just 0.6%, which is the lowest decrease in the EU. Swedbank economists do not think that this is a short term coincidence and predict that Lithuania’s GDP downturn will be the smallest among all Eurozone members.

“Just as we predicted in spring, the Baltic States did not land among the EU countries most struck by the pandemic and Lithuania’s economy particularly shone through. Such resilience on the part of the Lithuanian economy is neither coincidental nor temporary.

Over the first half of this year, exports, bar oil products, only fell by 2.4%, while the export of food produce, beverages and fertilisers even grew by more than a tenth. What helped us was low dependence on foreign tourist arrivals and Lithuanians, less able to travel abroad, rather than shutting themselves in their homes, travelled and relaxed within the country,” N. Mačiulis comments.

According to him, Lithuania avoided a more sizeable economic shock also because household consumption returned to pre-lockdown levels very quickly, already at the beginning of summer. The economist lists several reasons, which helped avoid a greater economic downturn.

“Lithuania met the crisis with its economy being particularly well balanced: holding a record foreign trade surplus, balanced state finances, holding no excess financial commitments and with a real estate market that hadn’t overheated. We predict that due to citizens’ incomes not falling and their expectations recovering quickly, this year, housing prices will not only not fall, but will even rise by several percentage points,” the Swedbank chief economist says.

Employment and wages to continue growing, but the risk of inflation exists

Lithuania stood out among other countries with also very modest negative consequences on the labour market. While the registered level of unemployment still rose through summer and reached 13%, economists note that this indicator could be misleading.

“The registered unemployment level rose because individuals who previously never worked or sought work are now seeking employment or looking to receive social benefits. Increasingly telling are other labour market indicators – from the start of the lockdown to the month of August, the number of those entering employment was larger than the number of those fired and in late July, a record number of job vacancies were registered,” N. Mačiulis notes.

With official unemployment reaching record heights in August, the Swedbank chief economist believes that there are numerous ways to resolve this problem. One of them is to extend the minimum business permit duration, not permitting it to be issued for just a couple of days. N. Mačiulis muses that another method could be transforming benefits payment.

“There must be unemployment benefits payments, but the job seekers’ grant of 200 euro, it actually might be creating a distorted incentive to remain beyond the labour market, perhaps only receiving short term legal income or receiving illegal income.

One of the ways to improve the situation could be to transform this payment into a job finding grant. For example, if an unemployed individual finds work and retains their job for half a year, they could receive a grant for entering the jobs market. I believe that this could encourage a rise in employment,” N. Mačiulis says.

Over Q2 this year, compared to Q1, the average wage in Lithuania fell by 0.3%, while annual growth slowed to 5.3%. Swedbank economists predict that if average wages were to grow a little over 4% this year, next year this should ramp up to 6% growth.

“Predictions and fears of a drop in wages that some institutions exhibited were baseless and irrational. The record number of job vacancies, stable wage levels and the continuing difficult situation in most other EU countries could have contributed to how this year, we are observing and will continue to observe record levels of immigration to Lithuania,” N. Mačiulis states.

According to him, just over the first seven months of this year, there were 10 thousand more individuals arriving in Lithuania than emigrating, with most of those arriving being Lithuanians.

While the economic situation and its prospects are cause for celebration, economists warn about specific risks that Lithuania might face. With the economy recovering and public sector expenses continuing to increase at a rapid pace, inflation could accelerate – economists predict that in 2021 and 2022, it could rise to, respectively, 2.5% and 2.8%.

“Opportunities for affordable loans or even receiving grants from the EU open up favourable conditions to invest and create a more sustainable, greener and smarter economy. However, not all problems can be resolved solely by increasing funding. This should be clear by, for example, looking at the mathematics exam results for this year. The negative impact of a limping education system will be felt for decades and they can be removed neither through borrowed nor gifted money,” the Swedbank chief economist comments.

According to him, due to these reasons, while increasing state investment, neither the incumbent nor the upcoming government should forget to implement fundamental structural reform in the public sector despite this being unpopular.