Šimkus: The risks to the Lithuanian economy identified in March are confirmed

LB The chairman of the board said in the Seimas on Tuesday that the negative impact of the war on the Lithuanian economy is being mitigated by the preparation of business.

“Lithuanian business has learned a lesson – relations with Russia and Belarus have changed significantly and are much less intense than a decade ago. In the structure of exports, Russia and Belarus do not exceed 15% combined.

In them, 15 percent. re-exports dominate, which creates relatively less added value, therefore the losses in this area would be much more limited, ”said G. Šimkus.

On the other hand, he acknowledges that the war will have a negative impact on the transport and logistics services sectors if they do not find an alternative. In addition, exports to Ukraine are declining, and they accounted for a significant share of Lithuanian goods.

“It simply came to our notice then economic will experience the indirect effects of the war, which are manifested through different channels, ”says G. Šimkus, Chairman of the Board of the Bank of Lithuania.

According to him, uncertainty hindering investment, tensions in energy and raw materials markets, leading to worsening inflation, shortage of imported raw materials causing difficulties for industry and construction industry, slower growth of economies of other Lithuanian export partners and growth of Lithuanian exporters.

Lithuanian bank presented forecasts for the development of the country’s economy in March. According to G. Šimkus, the situation has changed especially rapidly since then. The central bank will present new forecasts in a month.

“But today we already have data, which, unfortunately, already provides grounds to say that the risks identified in March are being confirmed. This is also signaled by declining confidence indicators, which have risen in price raw material and energy resourcesthe growing cost of goods and services, the difficulties experienced by railways, ports and other companies, ”says the head of LB.


© Vida Press

According to G. Šimkus, although economic growth will not fall to zero, it will be slower than expected.

“In other words, the Lithuanian economy is developing less favorably than expected in March. GDP forecasts will be reviewed downwards, this is already evident. On the other hand, at least for the time being, we danced, or we avoided a much bigger shock scenario, ”he added.

He also reminded of the more modest forecasts provided by the European Commission for the growth of the Lithuanian economy this year – 1.7 percent.

At the top of the inflation curve

According to G. Šimkus, inflation forecasts are also surrounded by uncertainty. If last year’s inflation was driven by the recovery from the COVID-19 pandemic, strong demand and then failing her supplyHas played a particularly important role in geopolitics in recent times.

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“The prices of energy resources – the main factor driving inflation – will increase the prices of electricity, gas, heat and fuel this year,” says G. Šimkus.

In his view, this should lead to a rise in prices for some time to come.

“Food prices will rise faster this year than we thought before,” said the head of LB.

According to him, the disruptions in the supply chains together with the rising prices of raw materials will increase the prices of industrial goods, and due to the extremely rapid continued growth of wages, the prices of services in Lithuania will increase rapidly.

“She has that ‘hump’ when it comes to changing annual inflation.” I think we are somewhere at the top of that ‘hump’ and the annual inflation rate should go down in the second half of the year.

Inflation could be pushed down by deteriorating business and population expectations due to the geopolitical situation, and the demand for other goods and services is suppressed by energy prices, ”says G. Šimkus.

Šimkus: The risks to the Lithuanian economy identified in March are confirmed

© DELFI / Karolina Pansevich

Opposition Democrat groupsIn the name of Lithuania“Representative Algirdas Butkevičius asked the head of the LB what his forecast of energy resources and raw material prices would be.

“Do you think we will return to low energy prices and low raw material prices after the war? I don’t really want to believe that, “said A. Butkevičius.

G. Šimkus replied that he did not think that there were any substantial reasons other than the war to maintain high gas prices.

“It simply came to our notice then. Are there fundamental reasons why, for example, natural gas prices should be what they are now?

I think basically the market hasn’t changed in some way, and in my head, they should be back to that pre-war level. Clearly, God forbid, Ukraine will win. We have to wait for the end of that war, “said the head of the LAC.

Speaking about oil prices, he said it was difficult to say whether they would return to previous levels, but one should not only look at the war factor.

“We also have a fight against climate change, the Green Rate, which is a separate component that will change both the demand for fossil fuels and its price in the long run,” G. Šimkus noted.

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G. Šimkus: housing prices are overvalued

The Governor of the Bank of Lithuania also drew attention to the activity and prices of the Lithuanian housing market. According to him, the mortgage loan portfolio grew particularly fast in the segment of retail loans.

“According to the latest data, its annual growth was 12 percent. and was broadly the fastest since 2009 and probably the largest in the euro area. This forces this market and this part of borrowing to be monitored very closely, ”says G. Šimkus.

Real Estate

Real Estate

© DELFI / Julius Kalinskas

According to him, a closer look at the country’s housing market reveals three things: the stagnation of activity after Russia’s aggression against Ukraine, as well as supply disruptions, which intensified again after Russia’s aggression, and, third, the continuing rapid rise in prices.

“Their annual growth has reached almost 20%. and was the highest since 2008. In other words, we see that housing prices are overvalued. By our estimates, they are overvalued by 9 percent. And as prices move away from economically reasonable values, the risk of price adjustment increases, ”says G. Šimkus.

He stressed that the regulator had already begun to apply targeted preventive measures to the second and subsequent home loans “which had been a cause for concern”. Banks’ capital requirements for the mortgage loan portfolio have also been strengthened.

“We also assessed the impact of Russian aggression on the Lithuanian housing market. Although we noticed a certain decrease in the sale of reservations in the primary housing market in the first months after the aggression, after the beginning of the invasion, so far that influence is limited, ”says G. Šimkus.

In his opinion, however, the impact on the real estate market is felt most on the supply side – the war poses challenges for the construction of new housing, the prices of construction materials are rising rapidly, supply chain disruptions may occur, and construction deadlines may be delayed.

In March, the central bank presented three scenarios for economic development: conventional, shock and larger shock. According to them, respectively, the country’s GDP is expected to grow by 2.7 percent this year, 0.4 percent. or decrease by 1.2 percent.

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