V.Vasiliauskas: this year the economy will contract by 2%, but expect one of the largest budget deficits and record debt | Deal

With the country’s business recovering faster than expected, the Bank of Lithuania is improving the country’s economic forecast for 2020.

The Chairman of the Board of the Bank of Lithuania, Vitas Vasiliauskas, reported at a press conference on Monday that the country’s GDP should contract by 2% this year. – These are much better forecasts than in June, when the forecast was almost 10%. contraction. In 2021, 3.1 percent has already been promised. increase.

The Bank of Lithuania improved its forecasts, taking into account the results of the second quarter and the last few months.

“The main factors are related to the fairly good situation in the export markets, the lower spread of the virus, the recovery of consumption fast enough and the favorable structure of the industry,” said V. Vasiliauskas.

He also mentioned that quarantine conditions were softer in Lithuania, quarantine lasted less, and tourism accounted for a relatively small part of service exports.

“Tourism is the most affected area, it is this small component that has had a positive effect. Also, the companies had reservations. Another factor is business support through benefits, as well as benefits to the population, which encouraged consumption. All this combination of factors has mitigated the fall in GDP and allows us to speak of the fall in the second quarter as quite small ”, added V. Vasiliauskas.

The Bank of Lithuania believes that due to these factors, the country’s economy has so far suffered less from the pandemic than most countries.

The summer statistics are also optimistic: key economic sectors, such as industry, commerce and exports, have reached or almost reached pre-pandemic levels and most economies can now function normally.

However, the uncertainty about the consequences of the pandemic for the economy remains high, so the Bank of Lithuania also assessed the harsh scenario, when in 2020. GDP contracts 2.4% and will not grow next year , and the favorable scenario is -0.2% and + 5%, respectively.

Debt is the highest in history

Although the Lithuanian economy has weathered the pandemic better than most countries, rapidly growing debt poses a risk.

The Bank of Lithuania forecasts that this year’s budget deficit will be one of the largest since the start of the data release, and the debt level will rise 10 percentage points, approaching 50 percent. GDP will be the highest in Lithuania’s history.

“Will we manage the growth of public debt? It is very important to have a plan on how we plan to get out of the current situation. The finance minister has identified this as the biggest challenge to date, as the increase in debt reduces the margin maneuvering in the future and when the debt is 50 percent. is close, there are only 10 percentage points left before the Maastricht criterion, and it is difficult to predict how the financial markets will react, “emphasized V. Vasiliauskas.

He pointed out that the growth of the debt should concern all the inhabitants, because if more money is spent in the payment and administration of the debt, less is left for other areas.

V. Vasiliauskas emphasized that for this reason it is extremely important to spend public funds in a rational, thoughtful, resolute and measured way both for the short-term economic stimulus and for longer-term investments, such as LITL 6.3 billion. for the DNA Plan for the Economy of the Future.

“We urge you to observe responsibly the measures that are established in the DNA plan. In our opinion, speed or haste, turning your head is not a necessity, it is better to allocate funds to projects that have passed the cost-benefit analysis and can create added value ”, said the Governor of the Bank of Lithuania.

V. Vasiliauskas mentioned the withdrawal of investments as another alarming sign.

“This is natural, because companies are behaving cautiously, but withdrawal can have consequences in the medium term, as investments generate benefits and value in the future, so this signal and indicator is really worrying,” said the Chairman of the Board of the Bank of Lithuania.

According to him, the investments in vehicles could be explained by the implementation of the Mobility Package, the companies predicted that the relocation activities would be closer to the places of provision of the service, which is what is happening.

“However, the decrease in investment in buildings and structures is especially worrying, here is the factor that should be paid attention to,” said V. Vasiliauskas.

The labor market recovers

Although the job market is relatively good, it has also been affected by the pandemic. The Bank of Lithuania notes that the number of employees has increased since June, but is still significantly lower than a year ago.

Wages, although they continued to rise, were much slower than before. The high level of unemployment was determined not only by economic development, but also by government decisions; registered unemployment had already stabilized in June, but was boosted by the introduction of job search benefits.

The Bank of Lithuania forecasts that in the case of the main scenario, the unemployment rate will reach 8.8 percent this year and the median salary will increase by 6.8 percent. It is true that the increase in the public sector is much faster than in the private sector.

Inflation is currently low and will be low in the near future: in the main scenario, prices will rise 1% this year and 1.2% next. Much of the inflation is driven by still rising service prices, although prices are rising more slowly.

Some even promise growth

Most economists have improved economic forecasts for 2020. After forecasting that the economy will fall 7% this year in June, the Ministry of Finance updated its forecasts in September and expects the country’s GDP to fall by just 1.5 %.

Swedbank economists are planning a similar drop, believing that this year Lithuania’s GDP will contract at least in the euro zone: 1.7 percent.

And Luminor Bank is the most optimistic: it predicts that this year the country’s GDP will not fall, but will grow by 0.2 percent.