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07/07/2020   Signs of rising expectations of business and consumers are observed but high uncertainty remains

The National Audit Office of Lithuania, implementing the functions of the budget policy monitoring institution (hereinafter - the Fiscal Institution), has carried out the assessment of the Economic Development Scenario for 2020–2023 prepared by the Ministry of Finance and concluded it to be suitable for the preparation of budgets attributed to the general government sector. However, the risk of the change of internal and external conditions, which might have a significant effect on the deterioration of the economic situation, remains and the scenario may not materialise.

In Q1 2020, the Lithuania’s economic growth was higher than anticipated and reached 2.4%. Nevertheless, in Q2, the impact of COVID-19 emerged: in April a double-digit fall in the exports of goods of Lithuanian origin (excluding mineral products) and in retail trade was recorded, the registered unemployment increased, while the expectations of business and consumers dropped. During May, the volume of industrial production was still decreasing, however, the turnover of retail trade was already higher than a year ago.

“Lower restrictions on economic activities lead to rising expectations of business and consumers, which were greatly fallen before. If negative sentiments persist, the household saving will grow even more, leading to further decline in domestic demand this year. High uncertainty also remains due to the possibility of the second wave of the pandemic, which could lead to the insolvency of companies and a consequent rise in unemployment. This could contribute to a greater economic contraction than projected”, says Jaroslav Mečkovski, Chief Specialist of the Budget Policy Monitoring Department.

However, the small and open economy of Lithuania depends not only on domestic conditions but also on changes in the international environment. In Q2 2020, geopolitical tensions are rising, which, in Q1, were overshadowed by the COVID-19 spread throughout the world. The mutual intentions of both the US and China to introduce additional tariffs on some groups of goods remains. EU plans to tighten the competition rules for companies from third countries that have been benefiting from large government subsidies did not ease the situation. In addition, the stalled negotiations on trade between the US and EU also have a negative impact.

European Commission, projecting a significant decline in EU GDP, using the proposed EUR 750 billion rescue fund, seeks to revive EU economies. The increasing household saving rate in major EU countries is negatively impacting not only the domestic consumption of these countries but also the international trade in the EU. The international trade of Lithuania will be negatively affected by the possible adoption of the Mobility Package in the medium term. If the EU and the United Kingdom do not reach an agreement, the risk remains that the Hard Brexit will occur.

The Ministry of Finance projects that, in 2020, the real GDP of Lithuania will shrink by 7.0%. This will be driven by a decline in domestic consumption, investments, and exports. Economic recovery is expected in the medium term, however, during exceptional circumstances, it is especially important to assess the internal and external risks. When fiscal discipline rules are temporally not applicable during the preparation of budgets attributable to the general government sector, responsible and transparent budget planning remains relevant.

The forecast of Q2 2020 is presented in the updated heatmap of Lithuania’s economy. According to the assessment of the Fiscal Institution, the temperature of Lithuania’s economy, which has been increasing until COVID-19, is likely to decrease in Q2.

 

Responsible for the information Communication Division
Last updated on 20 July 2020

National Audit Office of Lithuania

Pamėnkalnio St 27, LT-01113 Vilnius, Phone: + 370 5 266 6793, + 370 5 266 6752, Email: nao@vkontrole.lt.