Economic development in Q1 2020 – last rays of light before the storm
The winds were favourable for Lithuania’s economy in the first quarter; however, in the second quarter the worldwide pandemic will weigh heavily on Lithuania’s economy as well. According to the first data covering the quarantine period, economic activity may decline to a similar extent as during the global financial crisis. Although the quarantine regime in Lithuania is now lighter than foreseen by the Bank of Lithuania in its economic projections made a month ago, its positive effect on the country’s economy is outweighed by worse-than-anticipated economic development in Lithuania’s main trade partners.
Comment by Darius Imbrasas, Senior Economist at the Macroeconomics and Forecasting Division of the Bank of Lithuania
Good performance in January and February was enough to outweigh the negative consequences of the quarantine introduced in mid-March, and for economic growth to remain in positive territory. According to flash estimates published by Statistics Lithuania, the gross domestic product (GDP) in the first quarter of 2020 increased by 2.5% year on year. Indicators of a large number of major economic sectors in Lithuania, such as manufacturing output, retail turnover, continued to improve, albeit at a slower pace, while the construction sector was less constrained thanks to warmer-than-usual weather. However, the dramatic change in the economic environment in mid-March forces us to focus on developments to be expected in the second quarter rather than on the results in the first quarter.
In the second quarter of this year, Lithuania is facing a decline in economic activity, which may be as severe as the fall during the global financial crisis. The publication of data for March and other more frequent indicators starts revealing the cost for the economy of quarantine measures introduced in Lithuania and in other countries in the world. It will be particularly high for the hardest-hit sectors: for instance, in March the number of air passengers was nearly 60%, the turnover of catering business – nearly 40%, and retail trade in non-food products – nearly 15% lower than the year before. The pandemic and quarantine have also affected the labour market: based on Sodra’s data for the last days in April, the current number of employees is 25 thousand (about 2% of all employees) lower than could have been in the normal course of economic development; the unemployment rate calculated by the Employment Services has increased similarly, to 11.3%, a level not seen since 2013. A difficult business situation is also confirmed by the fact that downtime is currently announced by about one fifth of Lithuanian companies, including a large number of manufacturing companies. While not yet apparent from the respective results for March, the share of companies that have announced downtime gives the impression that even manufacturing companies also producing goods for foreign markets are faced with difficulties. As in Lithuania, demand for goods and services in these markets has sharply declined due to the consequences of the pandemic and its control measures.
The economic situation in Lithuania’s main trade partners and in the rest of the world does not show any signs of improvement yet. For instance, the global economic growth projections were updated by the International Monetary Fund (IMF) in mid-April and revised significantly downward. This year the downturn is expected to be even more severe than during the 2008–2009 global financial crisis. Economic growth projections were revised to a fairly similar extent in respect of all countries throughout the world, thus further indicating that the consequences of the pandemic are felt worldwide. The fact that such a scenario is realistic is also supported by recently released statistical data. For instance, the annualised US economic downturn in the first quarter amounted to 4.8%, the largest fall since the global financial crisis. In the meantime, the situation in the labour market is even worse: between February and 20 April, 14.4% of employees lost their jobs (by comparison, the number of employees contracted by only 6.3% during the financial crisis). However, even in this context, the IMF emphasises that the future is surrounded by high uncertainty: at present it is difficult to assess further developments of the pandemic and the implications of the relaxation of the quarantine across countries, the share of companies that will not reopen after the lockdown, the extent and nature of changes in household consumption trends and patterns (e.g. habits of people to gather in large groups or to use public transport), the impact of fears of the second virus wave on corporate investment decisions. All these risks are also relevant for the assessment of further development of Lithuania’s economy.