Sectors affected by the pandemic are recovering at a varying pace, crediting has decreased but demand is slowly growing again

“The latest GDP figures confirmed that the last quarter, due to the shock caused by the pandemic, was the worst economic period that we faced since the financial crisis of 2009. But other high frequency indicators show that currently, a large part of the economic sectors have already, or almost, rebounded. However, the uncertainty, especially in export markets, is still extremely high and the recovery is uneven and fragile, therefore, we must employ economic stimulus measures as accurately as possible and deliberately,” said Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania.

The overall change of Lithuania’s GDP amounted to –5.4% in the first half of the year. Different sectors were affected differently by the economic downturn. During April, which was the worst month for retail, catering and drinks services (bars, cafés, restaurants) activity, which was affected by quarantine restrictions the most, shrunk by 70%, whereas clothing and footwear sales decreased by 72%. In May, the turnover of retail businesses started to improve and reached its pre-quarantine level in June. However, some sectors, for example that of catering and drinks services, still see a sales decrease by about a quarter when compared to last year.

Changes in staffing levels, as recorded by Sodra, show that the accommodation sector, which was one of the most affected during the pandemic and is generally exposed to seasonality, has been quickly recovering since June and the number of employees is also increasing in the sectors of trade, construction, entertainment and recreation. However, there are some activities that see no improvement. In March and April, the number of employees in manufacturing had significantly decreased and did not bounce back later. Similar trends developed in most of business-to-business service sectors, for example, in business support activities sector or professional services (marketing, accounting, law, consulting, engineering, architecture) sector.

Changes in wages show signs of recovery. Before the pandemic, wages were increasing by 9-10% in most activities, from March to April the growth had slowed down to 3–5%, whereas the newest data from June shows that wage growth is starting to recover and the growth rate has even reached pre-pandemic levels. However, from one month’s data it is yet too early to tell if this growth is sustainable.

Domestically oriented sectors show signs of stronger or weaker recovery, however, the same does not apply to development of exports. The worst month for exports of Lithuanian goods was May: compared to the same period of last year, exports shrunk by one fifth, making it the largest drop since 2010. Exports of most product groups are diminishing, the largest contributor to the exports drop being exports of timber and timber products, capital goods, and agriculture products and food.

Imports of goods are dropping even faster than exports. In April, the annual decline of imports stood at 29% and worsened even more in May – 34%, which raises questions on future economic growth, since the group of products where imports dropped the most significantly are capital goods and intermediate goods. Such a large decline suggests that companies significantly reduced investments and optimised existing inventories, and points to very high uncertainty surrounding future development. Business sentiment wasn’t improved by the publication of  IMF projections in July, as IMF worsened its projections of the contraction of the world’s largest economies: the euro area from –7.5 to –10.2, the US from –5.9 to –8 and China from +1.2 to +1%.

In the financial sector, the household housing loan portfolio continued to increase (+8.8%) in the second quarter, which in part compensated the slump of business (–9.2%) and consumer and other household loans (–1.1%) portfolios. Therefore, the overall private sector loan portfolio shrunk by about 1%, to around €20 billion.

Business lending (loans from credit institutions) decreased by almost half during the months of March to June – to €390 million. However, this decrease was largely compensated by government loans and guarantees given out to the most affected sectors. Funds that are already employed by using these means amount to €336 million. Therefore, the overall business lending flow (€726 million) was €70 million short of the number recorded during the same period last year (€796 million).

During the quarantine, the real estate market was also significantly affected: the sales of apartments of old construction fell by almost a half, whereas the sales of apartments of new construction almost completely stalled after a very active beginning of the year. House price growth slowed down to around 5% and house rental prices went down by 5–10%. However, a slight increase in flows of household loans suggests that buyers are slowly gaining back interest in real estate.

Commercial real estate market, which was for the last couple of years rapidly developing in Vilnius and Kaunas, shows no signs as of yet of stopping office building constructions that are already under way. If commercial real estate supply continues to significantly increase yet the economy does not rebound quickly, it poses a risk that there will be a rise in office vacancies in the capital; therefore, it is possible that rental prices will fall in the future, resulting in impairment of real estate.