The historical situation in the Lithuanian economy is fixed
When the covid pandemic started, we were used to monitoring the number of infected people on a daily basis, and now one of the most monitored indicators is the inflation rate. How much more will the prices rise? When the economic crisis hits, won’t wages, which have risen rapidly so far, begin to decline? How to deal with your money so that this crisis does not push you into a financial hole? Answers to these and many other questions relevant to both ordinary residents and business representatives were provided by economist Vaidotas Tuziks, a representative of the Bank of Lithuania, who visited our city on the occasion of Manager’s Day at the invitation of the Kėdainiai branch of the Kaunas Chamber of Commerce, Industry and Crafts.
It is not worth being pessimistic
Although the talk of the coming economic crisis has not been silent for several years, ordinary people live as their wallets allow: some try to squeeze every euro out of fear, while others spend it on luxury vacations and the purchases they want with a calm heart.
V. Tuzikas, Chief Economist of the Macroeconomics and Forecasting Department of the Economics Department of the Bank of Lithuania, who presented a report on the development of the Lithuanian economy and the prospects for 2023 in Kėdainiai, says that one should not be too pessimistic for the time being. Bigger challenges are expected for businesses, while for the population – insignificant difficulties, because people have money, it only matters how the population will be willing to spend it.
“GDP shrank slightly in the first quarter, so economic growth is currently slowing down. Certain indicators predicted a similar situation already in the second half of 2022, so we are not surprised. The year 2023 becomes a year of solving challenges for companies, as they are faced with a decreasing number of orders, and difficulties related to the lack of raw materials and workers remain.
Lithuania is a small but very open economy: we import and export a lot. In this difficult economic period, the business sector whose activity is export may experience problems.
Economic activity may contract slightly, but we analysts do not foresee a dramatic situation. This year will be worse than last year, but we shouldn’t expect something similar to what happened in 2008-2009,” the interviewer assured.
This crisis is different
As V. Tuziks explains, this economic crisis will not be comparable to the previous crisis, because now the situation is completely different.
“The real estate market contributed a lot to the crisis of 2008-2009, sales were huge, the construction sector lived very well. And when everything suddenly stopped, a domino effect began: some could not repay their debts to others, and a wave of bankruptcies swept through. Now the situation is fundamentally different: the indebtedness is not so high, and the real estate market is more sustainable. So the situation is not comparable”, emphasized the representative of the Bank of Lithuania.
Good news for Lithuania
The Eurozone, which also includes Lithuania, is very close to the ongoing war in Ukraine, so, according to V. Tuzik, this is one of the factors why the economy of this region will grow more slowly.
“According to the International Monetary Fund, this year’s growth will be less than one percent, while last year’s growth exceeded 3 percent. This is due to all the difficulties associated with the war: the lack of raw materials, the declining demand, which is also affected by the tightening of monetary policy that began in the Eurozone, when the European Central Bank started raising interest rates. The good thing is that due to the tightening of monetary policy, Lithuania will suffer much less as loans become more expensive, because in the European Union our country is distinguished by the fact that our population has relatively little debt,” the economist pointed out.
V. Tuziks added that it was necessary for the European Central Bank to tighten the monetary policy because it helps to manage inflation. According to the economist, the era of cheap money has ended irretrievably. From now on, we will have to get used to the business models that existed before the pandemic, when money cost money.
Energy shock is a thing of the past
An important component of this economic crisis is the painful energy shock.
“This is already the past – prices are returning to the pre-war level,” reassures V. Tuziks and reviews the past situation and future trends. – The price of oil reached its peak, one might say, after the start of the war – in the months of February-March 2022. Then the price jumped above 120 US dollars per barrel. Since then, with some fluctuations, the price has clearly declined and is currently around $75. Oil is likely to cost more than it did before the war in the next couple of years, but the price has now nearly halved from its peak.
The level of the natural gas price is currently close to the level of the first half of 2020-2021 – 40 euros per MWh, but at the end of the year, the price of gas is likely to increase slightly again. This is related to filling storage before the heating season in Europe. The good news is that prices are not expected to jump as high as they did during the peak in the second half of 2022, when the price of natural gas exceeded 300 euros per MWh, and will remain around 50 euros per MWh.”
Cheaper food will have to wait
The extremely high prices of food products also caused great indignation of the population.
“Food prices are still rising and remain the main factor determining inflation in Lithuania. We will have to wait until the prices start to fall, says V. Tuziks. – Increased prices of food raw materials and food fueled inflationary processes around the world. In 2022, inflation in Lithuania amounted to 18.9 percent. Inflation will decrease this year. According to forecasts, inflation in Lithuania should be around 10 percent this year, and in 2024, inflation is expected to slow down even more and approach 2-3 percent.”
According to V. Tuzik, although 14 months have passed since the start of the war in Ukraine, the population’s economic expectations for the future have improved, but the population is still worried when they feel the rising prices.
“People are trying to avoid unnecessary large purchases. This shows the anxiety of the population. They are in no rush to spend money. Domestic demand is decreasing,” the economist explains.
Western Europe does not see it
V. Tuzikas pointed out that wages in Lithuania are still growing quite rapidly – about 13 percent.
“Such growth rates are huge. Western European countries do not see such numbers. For them, wages increase by only 2-3 percent per year, says the representative of the Bank of Lithuania. – In the private sector, wages are growing a little faster than in the public sector, but since the private sector is larger, it is natural that it will set the tone for raising wages in the public sector as well. Otherwise, there will be a lack of workers here.
According to economic activities, wages grew the fastest in the IT sector – 17.2 percent. Although this sector is already a salary leader, there is strong competition for existing specialists. Wages grew by 15.6 percent each in the fields of education and transport.”
Economists believe that wages should not decrease, as the competition for highly qualified specialists in Lithuania will still remain.
V. Tuziks presented quite a sensation. It turns out that the historical situation in Lithuania is fixed – the growth of the labor force. This happened after a record two percent increase in the number of permanent residents in our country.
“As the country’s working-age population increased, the labor force grew, and the number of employed persons reached a level not seen in a long time,” explained the economist. – War refugees also made a strong contribution to Lithuania’s GDP in 2022. Most of the 60,000 Ukrainians of working age who came to our country found work and created about 400 million jobs. euros, or 1 percent of added value.”
Advice for residents
We asked V. Tuzik to advise how an ordinary resident of the country can survive this period of economic anxiety financially safely.
“I would advise ordinary people not to spend all their money and not to borrow too much, because the rapid growth of wages observed in Lithuania over the past five years may slow down in the next few years. So, if you don’t make reckless financial commitments, borrow only when you really need it, and if you decide to invest wisely, you will definitely survive this economic slowdown,” said the guest.
According to V. Tuzik, the economic tension in Lithuania should subside when the war on the side of the European Union ends.
“The cause of all these difficulties is, in principle, the war started by Russia in Ukraine. When it ends (and all wars end sooner or later), then the situation will begin to normalize, V. Tuziks explained. “However, as long as there are military actions and more or less escalation, there will be economic turbulence of one kind or another for some time.”