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The Ministry of Finance: “Economic Recovery is Strongly Linked to the Further Development of the Pandemic”

Date

2021 03 31

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The basis for economic recovery is further containment of the pandemic and massive vaccination of the population – it is foreseen in the updated spring economic development scenario for 2021-2024 prepared by macroeconomic experts of the Ministry of Finance.

“The acceleration of the public vaccination process is a factor stabilising not only the health system, but also global economies. Even though Lithuania experienced one of the mildest economic downturns in Europe during this pandemic period, uncertainty about the future remains. This year Lithuania’s economy is expected to return to the path of growth, which in the medium-term is likely to grow even further, but the pace of recovery depends crucially on further epidemiological trends," said Minister of Finance Gintarė Skaistė.

The Minister also noted that although COVID-19 has worsened the labour market situation, improvement is expected in the medium term.

“Without any doubt, the pandemic worsened unemployment rates in Lithuania, but the situation should improve in the future. Regarding wages – they will continue to grow faster than inflation, therefore, the purchasing power of the population will continue to increase”, said the Minister adding that the recent decline in domestic demand will be driven by household consumption and accelerated investment processes.

According to the economic development scenario of the Ministry of Finance, after the recession caused by the pandemic in 2020, Lithuania’s economy is expected to recover this year. As the epidemiological situation deteriorated markedly in the fourth quarter of 2020, the negative impact of the COVID-19 virus on the economy is also felt in the first quarter of 2021, and accelerating mass vaccination from the second quarter is likely to lead to an increase in economic activity. Over the whole year 2021, Lithuania’s economy could grow 2.6 %, while the acceleration of economic recovery is expected in the medium term – gross domestic product (GDP) could grow on average 3.2 % per year. 

After a downturn last year, from 2021 the domestic demand should start to recover, while the main drivers of recovery will be growing household consumption expenditure and gross fixed capital formation. As uncertainty decreases, expenditure on gross fixed capital formation is expected to grow 4.6 % this year, while household consumption expenditure is projected to grow 2.6 % (in the medium term could grow on average 5.6 % and 3.3 % per year, accordingly).

Last year the COVID-19 pandemic significantly worsened the labour market situation in the country. Taking into account labour market trends, increased duration of the second quarantine and assumptions about the vaccination of the population, the unemployment rate in the country is expected to remain at the same level as last year. It will account for 8.5 %, and the number of employed people will grow 0.7 %. The Government support measures and the ability of enterprises to adapt to carry out activities under unusual conditions of the COVID-19 pandemic until it is contained will have a cushioning effect on jobs and employment.

In the coming year of 2022, under faster growth of the economic activity, the number of employed population will grow 0.9 %, and the unemployment rate will fall to 7.5 %. In the subsequent medium-term years, the number of employed population will start to decline gradually, while the unemployment rate will decline at a slower pace and will reach 6.5 % at the end of the medium term.

After a strong wage growth last year, the impact caused by the COVID-19 pandemic on the national economy will also dampen the wage (W) growth rate. In a context of increased unemployment rate and high uncertainty – this year, as compared to 2020, the W growth in both the public and private sectors will be slower.

This year, the average monthly gross wages in the country are expected to grow 5.2 %, and in 2022 the growth rate will slow down to 4.5 %. In the medium term, the W growth rate will exceed inflation, therefore the purchasing power of employees is expected to grow further.

Last year the inflation slowed down to 1.1 %, but in 2021 it will accelerate. This year and next year the average annual inflation will be 1.8 %, and at the end of the medium term it will be closer to 2 %. In other words, price increase is likely to remain within sustainable limits. The main factors behind the increase in prices this year are higher oil prices, as well as development trends in consumer prices. In the medium term, price developments of imported goods, especially energy, foodstuffs and services, the situation in the domestic labour market and decisions on administered prices will have a significant impact on price developments. 

The scenario was developed under conditions of high uncertainty. It provides for the following assumptions: the main export market of the Lithuanian goods and services – the European Union (EU) – will recover in 2021, and in 2022 the GDP growth is expected to accelerate; vaccines may be acceptable to the general public in the EU Member States in the second quarter of 2021, and mass vaccination will accelerate by mid-2021; the State financial assistance will support the viability of the economy; the majority of businesses will be able to resume their activities immediately after the restrictions have been lifted; specific measures to control the spread of the virus will be needed possibly for at least a year limiting economic activity and the mobility of the population, and the positive impact of vaccination on the economy should be felt in 2022.

At the same time, negative risk factors still remain. These include leaps of new outbreaks of COVID-19 strains and more strict measures to control them, delayed implementation of mass population vaccination plans, potentially irresponsible behaviour of the society, slower recovery in the euro area and global economy, fluctuations in global financial markets, geopolitical tensions. 

There are also positive risks − rapid and effective mass vaccination of the population and new treatments for the COVID-19 disease, stronger domestic and foreign demand, monetary and fiscal policy that promote economic growth, the EU’s Economic Recovery and Resilience Facility (ERRF) and its effective implementation, better demographic trends.

Additional information:

The economic development scenario was developed considering the actual economic development in Lithuania in 2020, changed statistical basis for the compilation of projections after the scenario published by the Ministry of Finance in December 2020, as well as changes in the epidemiological situation and external environment. Assumptions about the external environment in the medium term are in line with the economic forecast published by the European Commission in February this year.