Mauritius – on the threats to the economy: several factors are finally on the brink of recovery

The Lithuanian economy shows exceptional resilience to the COVID-19 crisis, says Ž. Mauricas. With a brief and shallow dip during the first quarantine, it completely avoided recession in the second 2020. mid-year and as early as 2021. it reached pre-crisis levels at the beginning.

According to him, the Lithuanian economy has surprised positively on several occasions.

“The first positive surprise was in the spring, when we fell less than in the EU, the second surprise, we did not fall at all during the second quarantine,” says the economist.

He points out that Lithuania’s GDP is officially ranked third in the entire EU. However, he points out that the GDP figures in this crisis should be interpreted with caution, since their dynamics are highly questionable.

According to the economist, Lithuania leads the EU in many macroeconomic indicators.
Retail sales figures as high as 17 percent. exceeds pre-crisis levels. “We practically resemble the United States,” he describes.

“The crisis had the shape of a ‘K’, it is a crocodile crisis. Most of the population was not very convinced of the stimulus measures. This year we will have rapid economic growth, next year it will be slower than expected. The volume of economic stimulus will decrease, uncertainty due to the pandemic, the broken chain and the sharp increase in house prices will decrease. All of this will end in the wheels of a sustainable recovery, ”said Ž. Mauricas.

The bank’s economists have improved their economic forecasts for Lithuania. According to Luminor’s latest forecast, Lithuania’s gross domestic product (GDP) will grow 4.5 percent this year and 4 percent in 2022.

In the spring, the bank projected that in 2021. GDP will grow 1.8 percent, and in 2022 – 5.5 percent. At that point in 2023. Projected growth will be slower, reaching 3.6 percent.

“All institutions have improved their forecasts for this year due to high uncertainty. The big recovery was expected to take place next year, not this year. But we see that this year people have adapted to limitations and fears have decreased, so consumption has not stopped. Expectations were very high. And investment looks much better. The first quarter result is unusually good “, – concludes Ž. Mauricas.

“Next year, growth will be hampered by inflation, and its effect will be felt especially in the first half of the year. By the middle of next year, prices should stop growing,” predicts the economist.

The unemployment rate is also forecast to grow 3.5% this year and 6.8% next.

Salaries in the country should increase by 9%. In 2021 and the same in 2022.

According to him, the growing problem of labor shortages may slow down the growth of the Lithuanian economy.

“A paradoxical situation has arisen in the labor market, when at the same time there are a record number of vacancies and a relatively high unemployment rate. 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 it is unlikely that rapid economic growth will be sustained by reducing the supply of local labor ”, says the economist .

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.

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.

In a world of tight supply chains, he cautions against preparing for Christmas in advance. However, he also sees opportunities for Lithuania here.

“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 industrial companies, 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 26% ”, says Ž . Mauricas.

The economist mentioned possible threats to Lithuania.

“There is a narrative that there was no crisis or we don’t feel it much, maybe there will be no crisis at all, because money will be printed and then there will be great temptations,” says Ž. Mauricas.

According to him, the first temptation, if you believe this narrative, is the threat of a real estate price bubble.

“If you think there will be no crisis, you can pay significantly more for real estate, because in the future the property will become more expensive and you will not lose. But you don’t have to lose a cool head, “he warns.

As they say, the main danger is that we lose international competitiveness. “When there are opportunities for telecommuting, people will migrate to those cities where housing will be cheaper. …

Growth will not last forever, too many bubbles should not be inflated, because in the US the wave has already subsided, and in Lithuania we see the apartment market stabilize in autumn and return to the pre-crisis level ”, says Ž. Mauricas.

The second temptation is a new middle descent from the apartment.

“With half a joke, we forecast that in 2035. We will reach the Honkonko level, which is a world record, if the number of new built in Lithuania continues, there would be a downward trend. The average housing for families with children in Lithuania is 64 m2. Meter. Families with children. This is a bad trend, “says the economist.

Another temptation is rising inflation.

“The prevailing narrative is that prices are going up everywhere because money is being printed. So why not raise prices? If that prevails, we can inflate the price bubble. I think in 2017. We will repeat the price jump, apparently in 2007-2008. We will not repeat. In any case, inflation will be quite high at the end of this year “, he points out.

Being able to borrow cheaply causes certain temptations.

“The question is whether that money is being used effectively. I think there is a high risk that they will not be used effectively. If there is indebtedness, it should not stand out from the context. Unfortunately, Lithuania stands out because last year the extra money was distributed before the elections, then we had a long and strict quarantine, we had to throw the money there. We still have other crises besides migrants, so Lithuania’s debt growth is the highest in the region so far, ”says Ž. Mauricas.