What economic crisis is coming in 2023 in Lithuania?

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Inflation will likely be below 10% next year, and prices will not fall – they will continue to rise at a slower pace. Energy resources and fuels will no longer be such a hot topic, and their prices may even fall, Deimantė Buslevičiūtė is writing at tv3.lt news portal.

However, the most significant changes will be in the real estate, construction and finishing sectors, as people are and will be increasingly cautious about their house purchases. Many families will be affected by the apparent rise in interest rates. The ongoing war in Ukraine has and will have a major impact.

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Lithuanians are being encouraged to pay more attention to their finances, not to spend and save, but non-essential goods and services will suffer. The catering sector is expected to be quite severely affected.

However, both wages and pensions will rise, so those who keep their jobs may be better off than this year. The crisis will not affect much-needed IT professionals, but workers in sensitive sectors will have a more challenging time.

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The crisis will not reach 2009 levels

According to Indrė Genytė-Pikčienė, Chief Economist at ‘INVL Asset Management” Investment Management and Life Insurance Group, when we talk about the crisis, we tend to look at our own experiences.

And Lithuania has indeed had some very difficult ones in its relatively short history of independence: the first decade of transformation and the establishment of a market economy was marked by banking and currency crises and culminated in the Russian crisis.

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“We were also hit very hard by the Great Recession in 2009 when the Lithuanian economy suffered one of the worst recessions in the EU. However, economic development is cyclical, with a boom and expansion phase being replaced by a more sluggish phase.

And it does not have to align with our experience with crises. It’s just that the economy stalls or slides slightly into negative territory, but these changes don’t have the painful consequences for the population that happened in 2009,” the economist says.

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She pointed out that next year, too, a phase of slower development is forecast, perhaps a slight recession, which is technically of more interest to economists but may not even be felt by ordinary citizens.

According to her, the underlying reasons are objective: the war on the sidelines, the more modest business appetite for investment and expansion due to increased uncertainty and risks, the lower demand from core export markets as their economies are also contracting, the energy crisis and the sharp increase in the cost of almost all factors of production, the rise in interest rates and the decline in market liquidity.

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According to Ms Genytė-Pikčienė, Lithuania’s economy has been growing very rapidly over the last couple of years, so it would be very difficult to continue its rapid expansion and to surpass this performance in the event of a change in external circumstances (war breaking out, aggressor markets closing, rising interest rates and slowing down in the development of core export markets):

“However, historically, Lithuanian business has proven its flexibility, adaptability and ability to exploit unexpected niches, so let’s hope that next year will be no exception.”

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Inflation will fall, but prices won’t rise

Economist Marius Dubnikovas does not hide the fact that 2023 will be a year of recession, i.e. contraction.

“As to whether it will be a crisis or a recession, because one or the other word is often used, it is possible to joke a bit. If your neighbour loses his job in a contraction, it will be a recession, and if you yourself lose your job, it will be a crisis.

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That is probably the answer. The person who keeps his job next year should not really worry because the economic contraction if there is one, is likely to be quick, not too deep”, he said.

He pointed out that the Bank of Lithuania’s forecasts gives a pretty good indication of what to expect next year, i.e. a fall in inflation below 10% from the middle of the year. However, Dubnikov notes that falling inflation does not mean falling prices but a slowdown in the price growth rate.

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So prices will remain quite high and, according to Dubnikov, will probably not be lower than this year’s levels, so more money will have to be spent: “The good news is that for most people, wages will still rise and growth will beat inflation. Quality of life will remain similar and maybe even improve in some cases.”

According to the expert, there is also now a final exit from COVID-19, which will provide a broader range of living circumstances, a free market and more exciting pastimes. However, the economist points out that it is important not to lose sight of managing your finances.

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He points out that the people most affected by the price rise are those who often make impulsive and unplanned purchases: “In Lithuania, it is not popular to plan your spending, and it is rather frowned upon. So my wish for next year would be to remember this simple rule – to set aside at least 10% of your income, and that cushion really pays off, especially in more difficult times.

If more people were to come forward next year and save at least a little bit, I think we would feel a little bit safer in the future.”

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€2-5k higher interest rates, difficulties in the construction and café sectors

Mr Dubnikov said that next year we are unlikely to be talking about the same topics as this year, i.e. energy or fuel. These topics may come up in the next cold season, but they will not be as acute as this year.

The speaker pointed out that the topic of interest rates might become more acute in 2023, as they have already started to rise this year. For example, Euribor, the 6-month interbank interest rate, which is the most commonly used for loans, was minus 0.5% at the beginning of 2022, and today it is approaching 2.6%, which is a change of 3 percentage points.

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“This means that on a loan of €100,000, around €3,000 could be spent on servicing the loan alone. Many people have not yet felt this effect, as loans are usually recalculated every six months. But in the coming years, it may be a surprise that you will still have to pay more for your loans.

The average loan amount in Lithuania has recently been published at €90,000. So my calculation of EUR 100 000 is very close to the average loan. This means that an extra 2-3 thousand or even 4-5 thousand euros a year could be a significant figure because it is an extra few hundred euros a month,” the economist explained.

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According to him, there are chances that gas and electricity prices will decrease slightly in 2023. However, there will be many challenges in other sectors, such as catering, because as costs rise, people find it easiest to give up non-essentials, namely going out to a café or restaurant.

According to the expert, these sectors are most affected by the first drops, as they are already affected by the pandemic and have been suffering quite badly over the last 3 years. He adds that the workers in that sector also suffer because it is difficult to raise their incomes or salaries.

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“The big unanswered question is, what about construction? Obviously, property sales are falling dramatically today, so people are cautious about it. With falling sales, it is natural that the construction sector is slowly starting to stagnate.

The primary link, i.e. foundations, walls, roofs and windows, and then it can affect the secondary development, i.e. fitting out and finishing. This will see a change in the market in six months’ time. On the one hand, it will mean less work for some people. On the other hand, it will be possible to get a craftsman when you need him, which has been difficult so far”, said Mr Dubnikovas.

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Wage changes and the most vulnerable professions

I. Genytė-Pikčienė believes that the good news is that inflation will lose momentum next year, thanks to the effects of the comparative base and the significant drop in prices of raw materials. Price indices in commodity markets have been rolling off the top for some time now. This momentum will eventually reach final consumers through value-added chains.

Annual inflation is expected to slow to single digits, and wages are forecast to rise. Meanwhile, EU governments, including Lithuania, have set up anti-inflationary shields to protect citizens and businesses from the consequences of Russia’s energy war: energy poverty, social unrest, a wave of bankruptcies and a spike in unemployment.

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“The government’s decisions in the draft budget for 2023 will lead to a rapid increase in incomes for the most vulnerable segments of society, with rising pensions, social benefits and compensations. The total public sector wage bill will increase by a tenth, and the basic rate of the official salary used to calculate the wages of civil servants, officials, employees of state and municipal budget institutions, and judges will be raised by €6.

The minimum monthly wage (MMA) will rise from €730 to €840, and the tax-free rate of income will be raised by around 16% so that the income in the hands of the lowest earners will rise very significantly and, according to official forecasts, should outpace average annual inflation next year. Moreover, since the minimum wage can only be paid for unskilled work, the increase in the MMA floor will be reflected in the entire income vertical, and wages of skilled workers will have to adjust as well,” commented I. Genytė-Pikčienė.

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She pointed out that the private sector has specialities insensitive to economic cycles, which are in short supply and demand both in a growing and declining economy. For example, IT professionals and engineers – professions where salary growth is driven by a chronic shortage of professionals and the need to attract or lure them.

According to her, the salaries of cyclically sensitive sectors and professions – construction and real estate, non-essential services, catering and accommodation, and the like – are more vulnerable in such circumstances, as they tend to be more affected in a sluggish phase of economic development.

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Dubnikov added that significant increases in minimum wages and pensions were also expected. Next year, the minimum wage before taxes will be 840 euros, while in 2012, it was 870 litas, which, according to Dubnikov, is at least a threefold increase in 10 years.

Critical tips for the population and forecasts

I. Genytė-Pikčienė makes no secret of the fact that we are all very much affected by the war in Ukraine and the neighbourhood of the aggressors: “The war is about to end, and we seem to have lost our minds – the daily routine has overshadowed the horror, and even in such a context, there is more functional clarity every day: the economy does not stagnate, business is shrinking, and it is adjusting to the changes in the geopolitical context and challenges.

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But we need to realise that the war in Europe, on our doorstep, represents a structural tectonic break in our worldview that has been in place until then. A change that will have lasting consequences. As long as it is not over and the Russian regime threatens and intimidates with nuclear buttons, it will not be possible to return entirely to normal life because we will always have to consider the so-called marginal plans and the worst-case scenarios.

She added that Lithuania’s neighbourhood of war and aggressors is also very unfavourable in terms of reputation and business environment. This poisons the business climate, affecting investors’ expectations and decisions and the population’s choices, where security is a very high priority.

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In the face of high inflation and rising debt servicing costs, financial discipline and hygiene must be maintained at all times.

When all essential goods and services are becoming more expensive, it is crucial to plan to spend carefully and sparingly and not to be tempted by spontaneous purchases or other expenses. The consumption of unnecessary goods and services (culture, beauty, sport, leisure, luxury) should be avoided, limited, or enjoyed much less frequently.

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Replace clothing and footwear for reasons of wear and tear rather than because of a new fashion craze or a desire to refresh the wardrobe, and choose and use exchange platforms for this purpose. Avoid unnecessary products in grocery stores, even if you think about changing your holiday celebration habits: “Tables covered with food are not sustainable because a lot of it is not consumed and has to be thrown away. Lithuania is not doing well in terms of food waste.”

Dubikovas predicts that next year could be exciting, just like the last few. He says it is impossible to say unequivocally that it will be a very good or a very bad year. It will depend on how well we work and how focused we are: “There will be challenges, but they are surmountable, and today Lithuania is probably the best prepared to meet them.”

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