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According to Luminor’s chief economist, Dr. Sigismund Maurico, the global economic crisis caused by the COVID-19 pandemic was unprecedented in many respects: the recession, the scale of stimulus measures, the disruption in various sectors of the economy.
“The economic recession has been deep, but few have felt it, as homes and businesses have been protected by state-tailored economic stimulus measures. But the fear of a pandemic has come and gone, and the stimulus The economy has held up because governments and central banks are reluctant to “remove the glass of punch as soon as the party starts.” As a result of this policy, the global economy is moving at an unprecedented rate from recession to recession. overheating, increasing the risk of macroeconomic and financial imbalances, “said Luminor Bank CEO, economist Dr. Sigismund Mauricas.
Quarantine restrictions and other pandemic controls have disrupted production and logistics chains around the world, and generous economic stimulus measures have boosted demand for consumer goods. The widening gap between declining production and increasing consumption has led to a shortage of certain materials and equipment (such as semiconductors) and increased inflationary pressures.
“It is better to take care of Christmas gifts in advance this year, because global supply chains may be stagnant until next year. However, for Lithuanian industries, which tend to have shorter supply chains, this is not only a threat. , but also an opportunity. According to a survey by the European Commission, up to 70% German manufacturing companies claim to have limited production capacity due to lack of equipment and materials, and the share of these companies in Lithuania is only of 26% ”, says Ž. Mauricas.
The growth of the Lithuanian economy may be slowed by the growing problem of labor shortages. A paradoxical situation has emerged in the labor market, with a record number of job vacancies and a relatively high unemployment rate at the same time.
Labor market imbalances are caused by sudden changes in the structure of the economy (such as the growing popularity of e-commerce and the contraction of the tourism sector), restrictions on quarantine or labor migration, and economic stimulus measures that discourage some workers to return. to the labor market.
Therefore, Lithuania faces the difficult challenge of increasing the flexibility of the labor market and formulating a smart immigration policy, as rapid economic growth is unlikely to be sustained by reducing the supply of local labor.
It is also threatened by the rapid rise in house prices, fueled by the popular narrative that house prices will only go up in the future due to funds injected into the economy to stimulate it. Such a narrative draws speculators into the market, causing excessive demand for housing and, at the same time, prices. In Lithuania, the annual growth of house prices already exceeds 15%, and the growth of prices indicated in the housing advertising portals is even faster: in Vilnius it already reaches 19%, and in Palanga, even the 40%.
According to Ž. Maurico, the rapid growth in house prices and wages could also trigger a pinch of inflation. This would be a dangerous path for Lithuania, as the popular narrative that the injection of money into the economy is supposed to cause high inflation is unlikely to materialize.
“Consumer prices in the euro area have risen only 15% over the past decade. Despite the fact that the amount of money more than doubled. In Germany in 2022-2024, average annual inflation is projected to reach only 1.5 percent, and China, known as the world factory, is likely to surpass 2 percent in the near future as well.
Meanwhile, the weakening of the Polish zloty increased the difference in the consumer price level between Lithuania and Poland to a record 17 percent. Lithuania should see these trends as a warning and try not to fall into the spiral of rising inflation. Otherwise, high inflation may pose a threat to Lithuania’s international competitiveness in the medium and long term, “said Ž. Mauricas.
Most of the measures to stimulate the economy are aimed at maintaining the current situation, but according to economist Luminor, it is not enough for Lithuania as a fast growing economy to maintain the status quo. Finally, Lithuania should, whenever possible, open its economy by abandoning excessive quarantine restrictions and economic stimulus measures that distort the competitive environment, the incentive system, unbalance the labor market and increase economic uncertainty.
“Lithuania needs to grow to catch up with the richest western countries. The country’s economic development in the near future will be fraught with uncertainty, but if we manage not to inflate house prices and inflation bubbles, we will abandon the quarantine restrictions and use EU support funds wisely, Lithuania’s economic growth is likely to remain fast in 2021. and 2022 will reach 4.5% and 4.0 percent respectively.
Longer-term potential for economic growth will depend on the success of the transition from the narrative of “spending as much as you borrowed” to “spending as much as collecting taxes,” Ž. Mauricas.
