2022-09-26
Russia’s escalation of the war against Ukraine and its manipulation of energy supplies will have a negative impact on the economy, which will grow more slowly. High energy prices will also keep inflation elevated longer. In the exceptional circumstances of an energy shock, targeted measures to help people and businesses would mitigate the negative impacts.
“As the downside risks arising from the war against Ukraine and the energy shock materialise, the country’s economic growth will slow down and high inflation will become prolonged. In such an environment, we support and encourage the implementation of highly targeted state aid measures for vulnerable groups and businesses,” says Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania.
Russia’s continuing and escalating war against Ukraine has significantly increased the prices of the main energy resources and food commodities. While some of these have returned close to pre-war levels, the prices of some commodities, in particular natural gas, remain significantly higher and have a particularly negative impact on economic development. The prevailing uncertainty over energy resources and soaring inflation are slowing down growth in the countries that are Lithuania’s main trading partners and, accordingly, affect Lithuania’s economy. The 2.1% GDP growth forecast remains unchanged for this year, as a marked deterioration in the assessment of recent developments has been offset by a significant improvement in the first half of the year. However, Lithuania’s economic growth forecast for 2023 has been revised down from 3.4% to 0.9%.
Despite slower economic growth, the labour market is still experiencing labour shortages, with unemployment down to 5.2%. The last time such a low unemployment level was recorded was before the 2008-2009 financial crisis. In the face of labour shortages, average wages will continue to rise, although at a slower pace than in the past few years. Average wage increases are projected at 12.7% this year and at 8.7% in 2023, provided that the minimum wage is increased by 15% next year as has been currently proposed.
The outlook for consumption is clouded by high inflation, with consumers’ purchasing power falling and price increases outpacing wage growth. Annual inflation will reach 18.3% this year, but it is already starting to slow down and is expected to drop to 8.4% next year.
The repercussions of Russia’s war against Ukraine and its further developments are bound to have a major impact on the Lithuanian economy in the coming years. The nature of this factor means that the country’s economic outlook is currently shrouded in extreme uncertainty. Significant volatility in energy commodity prices, especially natural gas, is adversely affecting the sentiment and expectations of both households and businesses, leading to more cautious household consumption and undermining companies’ willingness to invest.
Under the circumstances, the Bank of Lithuania welcomes measures to assist the population and businesses provided they are in line with these principles: (1) targeted assistance is provided to vulnerable groups and businesses; (2) assistance reaches its beneficiaries automatically if their living or working conditions deteriorate below certain established criteria; (3) the assistance measures do not unduly reduce incentives for economical and rational use of energy resources; (4) public funds do not create excess demand that would lead to higher inflation; and (5) the measures adopted will accelerate the economy’s transition to renewable energy sources in the long run and reduce dependence on fossil fuels.
For more details on the projected economic development, see the Bank of Lithuania’s website and the latest Lithuanian Economic Review.