2022-03-22
Bank of Lithuania: Economic scenarios in the face of uncertainty caused by Russia’s aggression
First and foremost, Russia’s war against Ukraine is a human tragedy, but it will also have consequences for the global and Lithuanian economies. The direct impact on our economy will be limited due to reduced ties between the Lithuanian economy and the financial system and Russia. In time of extreme uncertainty, regular economic forecasts are replaced by possible economic scenarios. The Bank of Lithuania has prepared three scenarios.
“The global and Lithuanian economies are currently operating under the conditions of extreme uncertainty. Without a doubt this will have an impact on the economy of Lithuania, however, we will see a more clear scope of it in the future. We have provided our expert analysis to policy-makers who are deciding on the economic and financial measures which are currently needed, and we will continue to do so in the future,” said Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania of the Bank of Lithuania.
After the beginning of the Russia’s military invasion to Ukraine the global economy, which is still dealing with the consequences of the pandemic, suffered another blow. The ongoing war and the new sanctions on Russia and Belarus have an impact on the global economy via various channels: international trade, price hikes for energy resources and other raw materials, financial sector, capital and currency markets, investor and consumer confidence, and commodity price spikes.
The Russia’s aggression in Ukraine will have a negative impact on the Lithuanian economy through reduced export, possible disruptions to imports of raw materials and rising energy prices. The negative impact by the Eastern markets on Lithuania is lessened by the fact that Lithuania’s foreign trade with Russia has changed significantly, and trade relations before the outbreak of the war were far less intense than a decade ago. From Q4 of 2020 to Q3 of 2021 export to Russia comprised 6% of total Lithuanian exports, whilst export to Ukraine and Belarus amounted to 6% and 3%, respectively. Complete loss of exports to these markets in 2022-2024 would lead to a slower growth of the Lithuanian economy of up to 3 percentage points. It is likely that restrictions on imports from these countries will cause temporary disruptions to production due to a shortage of the necessary raw materials, but even once alternative providers will be found, the cost of acquisitions of these raw materials will be higher.
The economic consequences of the war in Ukraine for Lithuania’s other export partners will lead to a decline in aggregate foreign demand, which will worsen the growth prospects for Lithuanian exports. Oil and natural gas continue to rise in price due to refusal by the Western countries to purchase Russian resources which will lead to increased electricity, heating and transport costs for all the economic sectors and at the same time will boost consumer price inflation which could only be mitigated by a sharper fall in energy prices on exchanges, and the implications for consumers’ wallets – by new or extended targeted and properly calibrated compensation mechanisms. Increased uncertainty will probably stop business investment at least in the short-term, it will also have an impact on the choice of consumers to consume less and save more. In addition to those factors, the Lithuanian labour market will be possibly impacted by the increasing flow of Ukrainian refugees to Lithuania. If some people decided to stay in our country for a longer period and join the labour market, it would increase Lithuanian labour force and would alleviate the problem of staff shortages, which has become more acute in recent times.
Due to the ongoing high variability of these and other factors it is extremely difficult to assess the economic development of Lithuania and other countries. Therefore, the economists of the Bank of Lithuania prepared three scenarios instead of regular forecasts. Under the conventional scenario, based on the information available on 1 March, Lithuania’s GDP is projected to grow by 2.7% this year, while inflation is projected at 10.5%. In case of a shock scenario, which is based on assumptions and financial market information until 17 March, the country’s GDP will increase by 0.4% and the inflation will be at 11.1%. In case of a greater shock scenario, hypothetical additional shocks to the economy are projected which would lead to the decrease of GDP by 1.2% in 2022 and the inflation would be at 11.5%. For these two scenarios, only the development of the two main macroeconomic indicators – GDP and inflation – is considered.
More details on the possible economic forecasts can be found on the website of the Bank of Lithuania.