Lithuania’s economic development and outlook
27 March 2023
Recently, developments in the world economy have been better than expected. In late 2022 and early 2023, gas prices in Europe fell back to the levels seen before the launch of russia’s military aggression against Ukraine. It was underpinned both by the decline in gas consumption and the diversification of the suppliers of this primary product. EU restrictions on oil imports from russia and the price cap on oil coming from russia set by the EU and other countries did not cause greater tensions in the oil market. Over the past few months, the oil price has even been falling. Lower energy commodity prices contributed to a faster-than-expected decline in headline inflation in some countries, such as the euro area countries. The good labour market situation, sizeable fiscal aid measures and the expectations of businesses and consumers that were no longer deteriorating made it possible to avoid the previously forecast contraction of the euro area economy at the end of the year. This improves the short-term economic outlook for the countries in this group. Economic trends in some other countries are also more favourable than previously projected. Supported by private consumption, the US economy is expanding at a more rapid rate than previously expected, and the easing of COVID-19 containment policies suggest that China’s economy will recover faster.
Further economic development will be driven by growing purchasing power of households, rising investment and an improving situation of external trade partners. The negative average quarterly change in real GDP which was recorded in 2022 in Lithuania is expected to turn positive this year. Economic activity should be enhanced by a recovery in private consumption, as nominal income of households is projected to rise more than prices this year, contrary to last year. In other words, real income of households is expected to pick up again in 2023. This year, general government investment is also expected to contribute to economic growth more than last year. In 2023, the flow of EU support funds for investment is projected to increase markedly. The economic situation of external trade partners should also gradually improve. The average quarterly change in real imports of trade partners, which was negative in 2022, is expected to be positive in 2023. This should have a positive effect on the exporting sector of Lithuania’s economy. All of these factors will contribute to a consistent strengthening of economic growth. Lithuania’s real GDP is projected to increase by 1.3% in 2023 and by 3.2% in 2024.
Price pressures are easing slowly. As a result of greater diversification of supply and reduced use of energy commodities in different countries, international prices for these commodities have fallen sharply. For this reason and because of the base effect, the impact of energy prices on annual headline inflation in Lithuania has recently been more than twice as low as in September 2022, when it peaked. Energy prices that rise at a slower pace are the main contributor to the fall in headline inflation in Lithuania. The price pressures are slowly easing in global agricultural markets as well. The increase in supply and the fall in demand for these products lead to a drop in their prices in the mentioned markets. Partly for this reason and due to the base effect, food price growth is already slowing down in Lithuania, too. Other price increases, namely for services and industrial goods, are much less pronounced. These prices are more closely linked to Lithuania’s domestic economic development and are therefore strongly affected by unit labour costs which have been rising at a very fast and steady pace so far. However, unit labour costs are expected to increase less in the coming years, which will have a dampening effect on price increases that are more closely linked to domestic economic development. These factors are expected to lead to a rather marked fall in headline inflation over the projection horizon. Inflation, which stood at 18.9% in 2022, is projected to reach 9.0% in 2023 and 2.7% in 2024.
Table 1. Outlook for Lithuania’s economy
|
March 2023 projectiona |
December 2022 projection |
|||||
|
2022b |
2023b |
2024b |
2022b |
2023b |
2024b |
|
|
Price and cost developments (annual percentage change) |
||||||
|
Average annual HICP inflation |
18.9 |
9.0 |
2.7 |
18.9 |
9.5 |
– |
|
Gross domestic product deflatorc |
17.2 |
9.3 |
3.0 |
16.2 |
8.5 |
– |
|
Wages |
13.0 |
10.0 |
8.4 |
12.8 |
9.1 |
– |
|
Import deflatorc |
25.1 |
1.3 |
1.5 |
25.7 |
6.2 |
– |
|
Export deflatorc |
16.1 |
4.4 |
2.2 |
15.1 |
4.6 |
– |
|
Economic activity (constant prices; annual percentage change) |
||||||
|
GDPc |
1.9 |
1.3 |
3.2 |
2.5 |
1.3 |
– |
|
Private consumption expenditurec |
0.5 |
0.0 |
3.1 |
0.8 |
0.5 |
– |
|
General government consumption expenditurec |
0.3 |
0.0 |
0.0 |
0.2 |
0.0 |
– |
|
Gross fixed capital formationc |
2.6 |
4.5 |
4.5 |
2.3 |
5.1 |
– |
|
Exports of goods and servicesc |
11.7 |
1.7 |
4.7 |
11.5 |
3.8 |
– |
|
Imports of goods and servicesc |
11.1 |
2.3 |
4.7 |
11.3 |
4.3 |
– |
|
Labour market |
||||||
|
Unemployment rate (annual average as a percentage of labour force) |
5.9 |
6.6 |
6.4 |
6.1 |
6.7 |
– |
|
Employment (%, annual percentage change)d |
5.1 |
-0.5 |
-0.4 |
4.8 |
-0.5 |
– |
|
External sector (percentage of GDP) |
||||||
|
Balance of goods and services |
-1.0 |
1.1 |
1.6 |
-2.4 |
-4.0 |
– |
|
Current account balance |
-5.5 |
-2.5 |
-2.2 |
-6.0 |
-7.1 |
– |
|
Current and capital account balance |
-4.0 |
0.2 |
-0.1 |
-4.4 |
-4.5 |
– |
a The macroeconomic projections are based on external assumptions, constructed using information made available by 15 February 2023, and other data and information made available by 1 March 2023.
b Projection.
c Adjusted for seasonal and workday effects.
1.International environment
In 2023, inflation is expected to slow down in most economies across the globe, although the process will not be rapid. Inflation, which stood at 8.8% globally in 2022, is likely to decline to 6.6% and 4.3% in 2023 and 2024 respectively. Projected lower inflation will be mainly driven by falling energy and other commodity prices, as well as increasingly restrained growth in aggregate demand resulting from tighter monetary policy. Nevertheless, inflation projected to exceed the pre-pandemic rate of consumer price growth in the majority (~80%) of world economies in 2024.
While inflation is expected to decline in the euro area, economic openness will keep its trends closely related to further developments in energy prices and changes of the geopolitical environment. Annual average inflation in the euro area is expected to go down to 5.3% in 2023. The modest price growth can be attributed to weaker external demand, falling energy prices and the strengthening of the euro against the currencies of the euro area’s main trade partners (United States, UK, Japan).
Both Estonia and Latvia are projected to grow by 0.1% this year, while inflation is deemed to fall sharply. Slower growth in the countries will be strongly affected by declining confidence and consumption by households due to high energy prices and varying interest rates on mortgage contracts. Investment of EU funds and persistence of low unemployment are expected to contribute positively to economic outcomes.
2.Monetary policy of the Eurosystem
Over the past six months, the Governing Council of the ECB has taken decisive actions to normalise and subsequently tighten monetary policy. The euro area’s far too high inflation and its outlook have prompted historically particularly strong increase in key interest rates. Since mid-2022, the key ECB interest rates have already been increased by 3.5 percentage points, with the aim of bringing inflation sustainably back to the target of 2% over the medium term. It has also been decided to gradually reduce the size of the asset purchase programme (APP) portfolio.
Following the raising of interest rates in July and September 2022, the key ECB interest rates were increased by 75 and 50 basis points in October and December respectively, to stand at 2%. These significant interest rate hikes led to a particularly fast normalisation of monetary policy in the euro area. However, with the euro area inflation reaching double-digit territory and wage growth picking up, interest rates were expected to be raised further. While stronger wage growth helps to mitigate the negative impact of higher prices on purchasing power, it may contribute to higher inflation expectations and increase the risk of a wage-price spiral. In addition, a decision was taken in December to reduce the volume of reinvestments under the APP from March 2023. It was decided to reduce the size of the accumulated APP portfolio between March and June at the pace of €15 billion per month (the total APP portfolio stood at €3.25 trillion in January 2023).
Interest rates were raised by 50 basis points at the February and March 2023 meetings. Although gas and electricity prices on wholesale markets fell significantly in early 2023, price pressures for goods and services linked to the economic cycle remained strong. Headline inflation in the euro area reached its peak back in October, but it is still far from the 2% target, while core inflation (inflation excluding energy and food prices) has reached historically high levels and has not even started to decline. In this context, the key ECB interest rate was raised to 3%. Moreover, against the backdrop of elevated uncertainty in the financial system, in the March meeting it was stressed that all available policy tools can be used to preserve financial stability and a smooth transmission of monetary policy to the real economy.
Rising interest rates are expected to help bring inflation in the euro area back to the 2% target in the medium term. Although inflation in the euro area had crossed the 10% threshold in October 2022, it already fell below 9% in January–February 2023 (Chart 1). Should the impact of higher interest rates materialise in the medium term, the ECB’s projections foresee a return of inflation to the target level of 2%. Financial markets have priced further increases in interest rates. Market participants expect that interest rates should reach their peak of around 3.25% at midyear, before declining slightly. Financial market participants do not foresee a return to a zero or negative interest rate environment.
Key ECB interest rates continue to rise.
Chart 1. Actual data on the deposit facility rate, the euro area inflation and market expectations
Sources: ECB and Refinitiv.
Notes: Data as of 16 March. The interest rate priced by market participants may be subject to risk premium adjustments, therefore, actual expectations may differ.
With the continued raising of key ECB interest rates, banks in Lithuania and the euro area started to increase lending rates significantly (Chart 2). In the euro area, lending rates started to rise in early 2022, and as the year progressed, lending rates started to rise in Lithuania as well (for more details on lending in Lithuania, see Chapter 7. Financing of the economy). This particularly rapid rise in interest rates is due to the increase in the variable component of lending rates that is being directly affected by monetary policy decisions – approximately 90% of loans in Lithuania are granted with a floating interest rate (usually 3, 6 or 12-month EURIBOR). The future dynamics of lending rates will depend on the monetary policy stance and the financial situation of the economy and banks.
Financing conditions in the euro area have started to tighten.
Chart 2. Average interest rates on new MFI housing loans and loans to NFCs
Sources: ECB and Bank of Lithuania calculations.
Notes: 3-month moving average. Excluding revolving loans and overdrafts.
Interest rates increased by the ECB affect
Lithuania’s economy through various channels, most notably:
- foreign demand and foreign exchange rate;
- interest rates and credit;
- asset prices.
The peculiarities of Lithuania’s economy determine the varying importance of these channels. Due to great openness of Lithuania’s economy (the ratio of external trade to GDP was 175% in the first to third quarters of 2022), the foreign demand channel dominates. The monetary tightening by the Eurosystem is slowing down economic growth in the euro area, including Lithuania, but the tightening is necessary to ensure that higher inflation does not affect longer-term inflation expectations and that actual inflation in the euro area is brought back to the 2% target over the medium term.
Foreign demand and exchange rate channels
The foreign demand channel plays an important role in transmitting the effects of monetary policy to Lithuania’s economy. Lithuania is a small and open economy, where trade with foreign countries is an important part of the economy. Trade with the euro area countries accounted for nearly half of Lithuania’s trade volume in 2022, while the other half was trade with other countries of the world. Latvia, Germany and the Netherlands were Lithuania’s most important trade partners in the euro area in 2022. The ECB’s monetary policy decisions affect production and price developments in all euro area countries, thus influencing demand in these countries and contributing to changes in Lithuania’s trade. Tightening monetary policy is likely to reduce aggregate demand in the euro area, including for goods and services produced in Lithuania. This should contribute to more sluggish economic growth and slower growth in the prices of exported goods and services in Lithuania. Negative price pressures are likely to transmit to other goods and services later.
Monetary policy decisions also affect Lithuania’s economy through exchange rate changes. Faster rises of interest rates in the euro area, as compared to other countries, contribute to the strengthening of the euro against other currencies. The appreciation of the euro against other currencies increases the prices of exported goods and services in foreign markets, which in turn reduces external demand. On the other hand, imported goods become relatively cheaper, thereby boosting their demand. The overall impact of euro appreciation on Lithuania’s economic growth is likely to be negative. Lithuania’s economy is more sensitive to changes in monetary policy through the exchange rate channel than the whole euro area’s economy. Lithuania’s trade with non-euro area countries accounted for around 95% of the country’s GDP in the first to third quarters of 2022, while for the euro area this figure is significantly lower - around 61% of the euro area's GDP. In 2022, Lithuania’s most important non-euro area trade partners were Poland, the United States and russia.
Interest rate and credit channels
By changing key interest rates and using other monetary policy instruments, the ECB influences the borrowing conditions, including the supply and demand for lending. Interest rates and other instruments set by the ECB affect banks’ borrowing costs, which they pass on to households and businesses. The ECB’s long-term lending (e.g. through the targeted longer-term refinancing operations) increased the liquidity of the banking sector and improved their access to funds at below-market prices. Withdrawal of these instruments could contribute to a deterioration in borrowing conditions for banks. In addition, the rising deposit facility rate forms conditions for an increase in interest rates on deposits in commercial banks.
The effect of the interest rate channel in Lithuania is similar to that of other euro area countries, but two important aspects are worth discussing. On the one hand, a much higher share of housing loans in Lithuania is granted with variable interest rates (Chart A). For this reason, Lithuanian households are in the short term more sensitive to changes in the interest rates set by the ECB. On the other hand, the gross debt-to-GDP ratio of Lithuanian households is one of the lowest in the euro area (Chart B), which reduces the impact of the interest rate channel. Rising ECB interest rates is also one of the factors reducing the demand for new loans.
Chart A. Share of housing loans with variable interest rates
Source: ECB.
Notes: Share of variable interest rates* in mortgage lending. Average of the last 3 years. The latest observations are for December 2022.
* Variable interest rates or fixing up to 1 year.
Chart B. Share of household debts compared with GDP
(third quarter of 2022)
Source: ECB.
Chart C. Interest rate developments
Source: Bank of Lithuania.
The rise in key ECB interest rates and expectations of higher interest rates in the future also lead to a higher cost of borrowing for the Lithuanian government. Currently, Lithuania’s ten-year government bond yields are around 3.9%, whereas it stood at 0% at the beginning of 2021. This price of borrowing is higher than in Germany (2.3%) but slightly lower than in Italy (4.2%).
Asset price channel
The ECB interest rate changes affect asset prices, but this impact channel is less relevant for Lithuania than for the euro area on average. This is triggered by a much shallower financial market and, overall, a smaller financial sector in Lithuania, where a major part of assets is comprised of loans rather than financial instruments. For example, the ratio of financial assets held by the financial sector to GDP in Lithuania is about five times lower than the euro area average. Due to the relatively low level of sovereign debt, the ratio of the value of government debt securities to GDP is more than two times lower in Lithuania than the euro area average. The bond market of commercial banks operating in Lithuania is relatively even less developed. Private companies in Lithuania mainly finance their activities with their equity capital or, to a lesser extent, with loans from credit institutions, and only very rarely publicly issue debt securities. As financial markets in Lithuania are notably smaller than the euro area average (e.g. in terms of capitalisation-to-GDP ratio), the Eurosystem’s securities purchase programmes are carried out on a relatively smaller scale in Lithuania than the average in the rest of the euro area. All these factors dampen the impact of the Eurosystem’s monetary tightening on Lithuania’s financial markets, and hence on the economy.
The interpretations that central banks have issued too much money to save the economy from recession that circulate in the society and media is a misleading simplification. In modern economy, the link between money supply and inflation has weakened and is equivocal. Central banks in developed countries have ceased pro-active monetary targeting since the 1980s. Central banks have returned to their classic tool – steering interest rates, which affects economic activity and price setting through financing conditions and expectations. Owning to the combined efforts of monetary and fiscal policy, Western economies have avoided a severe crisis after being hit by two huge successive shocks – a global pandemic and the impact of russia’s war in Ukraine. Monetary policy and fiscal support enabled businesses and households to withstand the shock of disrupted supply and income losses during the pandemic, followed by rising energy and food prices at the outbreak of the war, thus avoiding a disorderly adjustment when experiencing the crisis. It is debatable whether the support to the economy could have been somewhat more moderate and the normalisation of monetary policy could have started a little earlier. But policymakers had to make decisions in real time under high degree of uncertainty, and the risk of contributing too little was too high and could be very costly.
Monetary targeting has become difficult to implement because money demand has become unstable and difficult to predict. In the 1970s and 1980s, advanced market economies moved away from excessively tight regulation of financial markets and encouraged financial innovations and competition between financial market participants. Then it became clear that the money volume demanded by the public (money demand) had become difficult to predict and measure, as it had started to respond sensitively and contradictorily to interest rate developments and the business cycle phase. For example, money demand grows not only in times of economic upswing but also in downturns as economic participants want to accumulate larger liquidity buffers. Financial market participants started to offer alternative forms of liquid assets that combined a settlement function and the ability to earn interest. These trends made life very difficult for statisticians and regulators of money supply.
After moving away from monetary targeting, central banks continue to calculate monetary aggregates and assess their factors. As credit institutions lend to the economy, money supply adapts flexibly to interest levels and the needs of the real economy. However, the dynamics and direction of the adaptation are highly dependant on the specific context, therefore, the response of the money supply to interest rates and the link with inflation can vary considerably between periods. Monetary analysis provides very useful information on monetary policy transmission through credit institutions to the real economy and on the financial stability of the banking sector.
The chart below shows developments in broad money supply, monetary base and inflation in the euro area since the creation of the euro area in 1999. We can see how the developments in money supply and inflation, and even their direction, have clearly differed from period to period, and the lagged inflationary response has also been very different. Please note the multitude of developments in the monetary base in the right-hand scale of the chart.
Chart A. Developments in broad money supply, monetary base and inflation in the euro area
Sources: ECB and Bank of Lithuania calculations.
With a pandemic of a magnitude not seen in a long time which hit the world in 2020, the need for accommodative monetary policy has further grown. Once again, as in autumn 2008, world economies have been gripped by the fear of a crisis and great uncertainty about the future. Concerted monetary, fiscal and macroprudential policy efforts have strengthened the aggregate demand. The sharp increase in the monetary base in 2020 to 2021 reflected the Eurosystem’s additional large-scale accommodative monetary policy measures. Encouraged by the accommodative measures, credit institutions increased their lending to the economy to meet firms’ increased need for liquid funds, which led to an acceleration in the growth of broad money supply at the time. These efforts led to a significant mitigation and shortening of the euro area downturn in 2020. Lithuania was one of the few countries in the monetary union to avoid economic recession altogether at the time.
The acceleration of inflation in 2021-2022 is due to a combination of strong demand and pandemic effects, and the war in Ukraine. Inflation started to rise rapidly from the mid-2021, when demand recovered, while production and supply chains were still disrupted by the pandemic. They were further affected and made more expensive by geopolitical factors. For a while, it seemed that the containment of the pandemic and the market mechanism would soon restore supply. Monetary policy regulates fluctuations in the real economy by influencing aggregate demand, and in the event of a supply disruption, central banks have to wait for market laws and structural government policies to restore supply balance. Unless supply disruptions affect the medium-term pricing and inflation expectations of economic participants, with inflation projected above the 2% average. However, the launch of russia’s aggression against Ukraine in February 2022 was an additional and severe shock to the global economy, leading to a dramatic rise in energy, commodity and food prices. As a result, high inflation got a second wind and spread into many economic sectors, threatening medium-term (2–3 years) price settings and inflation expectations.
3.Real sector
Unfavourable global trends and high inflation led to a slowdown in economic activity in Lithuania.
Chart 3. Contributions to GDP growth by the production approach
Sources: State Data Agency and Bank of Lithuania calculations.
High inflation and uncertainty over particularly high electricity and home heating costs have restrained household consumption growth. In the third quarter of 2022, household consumption fell by 0.5% quarter on quarter and by a further 0.8% in the fourth quarter. However, due to a very favourable base effect, household consumption expenditure in 2022 was 0.5% higher than a year ago. Given the average annual inflation rate of 18.9%, this development in household consumption is seen as especially positive. One of the most important contributors to this development in household consumption is the rapid increase in disposable income of households. At current prices, it was likely to be one-sixth higher in 2022 than in 2021. The main contributor to the rise in disposable income was the increase in the wage bill, which was boosted by both employment growth and wage growth (see Section 4 for more details). While wage and employment growth accounted for almost two thirds of the total rise in disposable income, household income also benefited from other sources, such as economic activity, property income and social and current transfers. It should be noted that so far there are no indications that a larger share of households would face financial difficulties. For example, the results of the EC’s consumer survey show that in January 2023, households were even more positive about their financial situation than in 2019, i.e. before the COVID-19 pandemic. Households’ expectations of both their financial situation and the country’s economic situation have also been improving since last October and in January was the best since the launch of russia’s war in Ukraine. One of the most important factors determining this sentiment among households is the decisions adopted in conjunction with the 2023 state budget which are expected to increase household incomes and limit the increase in energy costs (see Section 8 for more details). This, together with the expected slower price growth, should outweigh the negative impact of the tightening of monetary policy and rising interest rates on household consumption expenditure, and suggests that household consumption will start to recover in the near future. It should not go down in 2023 and is expected to increase by 3.1% in 2024.
Strong growth in household disposable income, even in the face of high inflation, has led to a modest fall in household consumption expenditure.
Chart 4. Contributions to real household consumption developments
Sources: Eurostat, State Data Agency and Bank of Lithuania calculations.
High energy prices in the second half of 2022 had a negative impact on the development of exports of goods and services, although they also triggered investment in the upgrading of energy generation and consumption facilities. Real exports of goods and services increased by 4.3% in the third quarter of 2022, compared to the previous quarter, but declined by 3.6% in the fourth quarter. The resumption of production at AB ORLEN Lietuva after planned repairs and a pick-up in reexports were the main contributors to growth in the third quarter, while the dramatic decline in the fourth quarter can be attributed to a very weak development of services export, contracted export volumes in the chemical and furniture industries as well as in wood and articles of wood. Overall, in the second half of 2022, high energy prices that significantly increased production costs, and a considerable drop in the main trade partners’ demand for goods and services produced in Lithuania led to a decline in the volume of exports of many goods produced in Lithuania. However, owning to very favourable trends, real exports of goods and services in the first half of 2022 were 11.7% higher than in 2021 (for more on external trade, see Section 5).
Slower growth in the economies of the main trade partners and that of Lithuania, uncertainty about further developments in the economies of the main trade partners and uncertainty about the course of russia’s war in Ukraine limited companies’ incentives to invest. However, high energy prices forced some of businesses to upgrade their existing energy generation and consumption equipment. The synergy of these factors led to rather sluggish investment in the second half of last year. General government investment is also likely to have intensified towards the end of last year. The synergy of these factors led to an increase in investment in the second half of last year, with investment rising quarter on quarter by 0.7% in the third quarter and by 3.1% in the fourth quarter. Of the investment types, housing investment saw the strongest growth over this period. However, in the short term, the volume of housing investment should not expand due to the tightening of monetary policy, sharp decline in RE market activity and the significant drop in the number of dwellings started. Investments in transport equipment and other capital goods, as well as in non-residential buildings and structures, were also higher than in the first half of 2022. The last quarter of last year also saw an increase in the construction of civil engineering structures, with investment projects by the general government or state-owned enterprises typically accounting for a major part of this work. The significant increase in EU investment support flows in the fourth quarter of 2022 suggests that the very sluggish general government investment of the past few years has been recovering. With the launch of both the Recovery and Resilience Facility and projects under the EU’s financial perspectives for 2021-2027, the intensified implementation of EU-funded projects is expected to be a key driver of investment growth this year. Investment is projected to grow by 4.5% in both 2023 and 2024.
In the second half of 2022, investment was mainly driven by the need to upgrade existing energy generation and consumption facilities and the intensifying use of EU support flows.
Chart 5. Investment development
Sources: State Data Agency and Bank of Lithuania calculations.
4.Labour market
The growth of the number of people employed was more moderate at the end of last year. The increase in the labour force led to a significant acceleration in employment growth in 2022. The increase in the number of employees was particularly pronounced, but the share of self-employed persons also rose significantly. Employment growth hit a record high in the first half of last year, with a year-on-year increase of 5.6% in the second quarter of 2022. According to the data from the statistical labour force survey, the number of employed persons was around 1,445 thousand in the third quarter of 2022 (seasonally adjusted data) and around 10 thousand higher than in the previous quarter, which is the highest level recorded since 2008. This employment development was significantly influenced by the successful integration of war refugees into the Lithuanian labour market (more details are provided in the next box). Administrative data from Sodra also confirms that the first and second lockdowns have had a much greater impact on the total number of jobs than the ongoing war in Ukraine (Chart 6). However, the latest data from the State Data Agency’s employment survey show that annual employment growth in the country slowed down to almost 3% in the last quarter of 2022. The slower, but still strong, hiring was driven by a technical factor, i.e. the fading of the low comparative base effect due to the exceptionally rapid decline in employment in the first half of 2021. Weaker growth in economic activity and lingering uncertainty due to geopolitical reasons have also contributed to such employment dynamics.
Contrary to the first and second lockdowns, employment development in Lithuania accelerated due to the hiring of war refugees since the outbreak of military actions in Ukraine.
Chart 6. Total number of employed persons
(7-day moving average)
Sources: Sodra and Bank of Lithuania calculations.
Note: Data until 16 March (seasonally adjusted).
Despite the slowdown in economic activity, the number of employed persons in Lithuania continues to grow, but not as strongly as at the beginning of last year. Administrative data from Sodra show that the number of employees continues to grow, but at a more moderate pace than at the beginning of last year when annual growth stood at 3.5%. In January 2023, the total number of insured persons was around 1.5% higher than a year ago. In particular, the number of employees is growing in information and communication and transport sectors, while hiring is also increasing in accommodation and catering companies. Business surveys also show positive trends. In February this year, companies’ attitude towards future headcount changes became more positive. Hiring expectations were 5% above the long-term average in the aforementioned period. Although resources are still available in the labour market, access to them is becoming increasingly challenging as employment and labour market activity indicators are close to their historical highs.
In the second half of 2022, the unemployment rate started to rise slightly in the country, mainly due to unskilled workers, as there is still a shortage of highly skilled professionals. From the end of the pandemic year until the second half of 2022, the number of unemployed persons was steadily decreasing in the country. By midyear, the unemployment rate in the country had fallen to 5.2% – such a low unemployment rate in Lithuania was recorded 15 years ago. Strong labour force growth (in the fourth quarter annual growth reached 2.2%) only slightly moved the unemployment rate up, which is still at a relatively low level. According to the State Data Agency, unemployment stood at 6.4% in the fourth quarter. It was 0.6 percentage points lower than a year ago, but 0.4 percentage points higher than in the third quarter, excluding seasonal effects. This annual change in the unemployment rate at the end of last year was mainly underpinned by somewhat slower but still strong employment growth and a decline in the labour force participation rate: over the course of the year, these indicators moved the unemployment rate down by around 2.4 percentage points and 0.3 percentage points respectively (Chart 7). The still relatively low unemployment rate in the country and the high level of hiring result in a number of companies facing labour shortages. Amid the current particular shortage of skilled workers in the labour market, their supply is not as high as that of unskilled workers. The unemployment rate of skilled workers is around 6%, twice as low as that of unskilled workers.
Last year, the decline in the unemployment rate was mainly driven by strong employment growth.
Chart 7. Contributions to the year-on-year change in the unemployment rate
Sources: State Data Agency and Bank of Lithuania calculations.
The number of registered unemployed persons has been rising markedly since last September, however, the long-term unemployed is decreasing. According to the Employment Service, the registered unemployment rate stood at 9.1% in February this year. At the same time last year, the share of unemployed persons in the working age population was slightly higher (10.0%). While the overall unemployment indicator is rising, the favourable labour market situation is reflected in the declining share of long-term unemployed workers. While the number of long-term unemployed workers had increased in the labour market suffering imbalances caused by the pandemic, their share in the overall structure of unemployed persons has fallen considerably. The latest data show that the share of long-term unemployed workers, compared to the total number of unemployed persons, amounted to 38% in the fourth quarter of 2022 and was lower than a year ago (43%).
Wage growth has been stagnating for just over half a year. According to the State Data Agency, in the fourth quarter of last year, wages in the country rose by 13.2% year on year. Wages in the private sector grew significantly faster than in the public sector, by 13.9% and 11.8% respectively. In the fourth quarter of 2022, wages grew at a double-digit pace in most economic activities. Wage increase was strongest in information and communication activities (17.2% year on year). Strong annual growth in labour income (around 16%) was also observed in education; transport and storage; and professional, scientific and technical activities, where there is still intense competition for workers. Remuneration of RE and health care workers increased slightly less (7.1%). The latest administrative data from Sodra for January also point to double-digit wage growth in the country, although it has not accelerated significantly for some time. In June 2022, compared to May, annual growth in labour income (seasonally adjusted) slowed down by a little more than 0.5 percentage points, and was close to 13% in the following months (Chart 8). According to Sodra, in January 2023, the wages of workers earning above the minimum monthly wage were about 14% higher than a year ago, and as much as 49% above the pre-pandemic average. In contrast to 2022, wage growth at the beginning of this year has been slower than the increase in the minimum monthly wage (15%) introduced in January 2023, which signals the easing of labour market tensions. The stabilisation of wage growth can be attributed to the gradual increase in the number of unemployed persons, more sluggish growth in hiring, declining demand for workers and fading labour shortage problems.
The growth of the average insured income in the country has been more moderate than in the early 2022, and the latest data do not point to further acceleration in wage growth.
Chart 8. Developments in the average insured income
(monthly data)
Sources: Sodra and Bank of Lithuania calculations.
Notes: Workers earning above the minimum monthly wage; seasonally adjusted data.
The labour market situation pertaining to labour shortages has become a little more relaxed. In the fourth quarter of 2022, the country recorded around 7% fewer job vacancies than a year ago, while the vacancy rate – an indicator of the share of total jobs that is accounted for by vacancies – is still high, but it has fallen significantly from a record high of 2% to 1.7%. Furthermore, the number of unemployed persons per job opening, a ratio that reflects upward pressure on wages and hence labour market tightness, has dropped for the third consecutive quarter, but is still almost double the average for 2008–2022. A more conservative stance in terms of demand for new workers is also likely to be contributing to the gradually subsiding tensions in Lithuania’s labour market against the backdrop of risks in the international environment and the still tense situation in the energy resources market. Improving migration trends play an important role in tackling labour shortages. Last year’s record-positive migration balance results in a more abundant supply of workers which makes it possible to better meet the high demand for workers. The fading labour shortage problems in Lithuania’s labour market are attested by the statistics of February business surveys, which show that the share of companies in all major sectors of the economy (with the exception of services) facing a shortage of workers is significantly lower than at the beginning of the year. For example, the share of firms in the industrial sector that identified labour shortages as a factor limiting their expansion was around 1 percentage point below the long-term average (for 2005–2023). In the retail trade and construction sectors, this share is close to the long-term average. Such trends suggest that it is somewhat easier for companies to find suitable workers, thus, the incentive to raise wages is lower.
The Ukrainian diaspora, spread around the world, is adjusting the demographic picture in other countries. Due to negative natural change of residents and emigration, the population of Ukraine had been declining rapidly since 1990, but the war in Ukraine accelerated this process significantly in 2022 (Chart A). According to the latest figures from the United Nations High Commissioner for Refugees (UNHCR), Ukraine had a population of 43.5 million people in 2022 – around 4 million, or 9%, fewer than a year ago. As of February 2023, the majority of people fled to Poland (around 1.6 million), Germany (0.9 million), the Czech Republic (0.5 million), Italy, Spain and the UK (0.2 million each). In the latter countries, the large number of war refugees from Ukraine has adjusted population indicators. The impact has been particularly strong in Poland and Lithuania, both of which have one of the highest percentages of Ukrainian refugees per country’s population.
Large influx of Ukrainian war refugees contributed to the changes in population dynamics in European countries in 2022.
Chart A. Population dynamics between 1990 and 2022 in the countries with the highest flows of Ukrainian war refugees registered for temporary protection under the EU’s Temporary Protection Directive
Sources: United Nations, State Data Agency and Bank of Lithuania calculations.
Lithuania’s population has decreased by a quarter since the restoration of Independence, but last year, due to a record-high net migration balance of foreigners, the number of permanent residents in Lithuania went up. In 2022, there were about 18 thousand more deaths than births, but this difference was close to the long-term average of negative natural population change. Despite the lower overall birth rate (around 6% fewer births last year compared to 2021) and the high mortality rate, the increase in the total number of permanent residents recorded last year was the highest since the start of data publication. Moreover, for the first time ever, the number of emigrants was lower than the number of immigrants in all counties of Lithuania. The annual population growth of almost 2% was mainly driven by favourable migration trends (Chart B). In 2022, large flows of foreign immigrants led to a record-high net migration balance, with around 72 thousand more people entering Lithuania last year than leaving it. The difference between immigrant and emigrant Lithuanian citizens was positive for a third successive year, exceeding 1 thousand persons, and about 71 thousand more foreigners entered the country than left it. As a result, last year the overall net migration balance increased significantly mainly due to the arrival of foreigners.
Last year’s record-high net migration balance substantially outweighed the negative impact of the natural population change on Lithuania’s record-high population growth.
Chart B. Contributions to the dynamics of the number of permanent residents in Lithuania in 2002–2022
Sources: State Data Agency and Bank of Lithuania calculations.
* Preliminary estimates.
The war in Ukraine has led to an increase in immigration of foreign citizens, especially Ukrainians, Belarusians and russians, as well as changes in emigration directions. According to preliminary estimates of the State Data Agency, around 95 thousand people immigrated to Lithuania last year, i.e. 60 thousand, or 2.1 times, more than in 2021. Of these, 2.8 thousand were russian citizens (around 3%), and almost one in ten immigrants were Belarusian citizens (9.8 thousand). 85% of all immigrants were foreign citizens, of whom as many as 76% were Ukrainians. Emigration direction patterns have also changed. In 2022, 23 thousand permanent residents emigrated from Lithuania, which is around 9% less than a year ago. The largest emigration flows were to Ukraine (around 20% of the total number: this refers to short-term migrants returning to Ukraine), the UK and Belarus (12% of emigrants to each country). Compared to 2021, the largest emigration decreases were to the UK (2.1 times), Germany (1.5 times) and Norway (1.3 times).
In 2022, changes in immigration and emigration patterns significantly altered the structure of the net migration balance of foreigners by nationality (Chart C). The record changes in the balance of net migration of foreigners were mainly driven by Ukrainians fleeing russia’s war in Ukraine: arriving and leaving Ukrainian citizens accounted for the biggest share (around 80%) of the difference between immigrant and emigrant foreign citizens. Over the past year, around 72 thousand war refugees from Ukraine obtained registration with the Migration Department in Lithuania (with the largest influx in March 2022, and a much lower flow of daily registrations recently). Most of them were women. Minors make up 35% of all registrants, those of working age make up 60% and those over the age of 65 make up 5% of all registrants. However, the mentioned number of refugees does not reflect the share of short-term migrants (those who left or did not obtain registration with the Migration Department). Following the publication of the preliminary annual migration statistics for 2022 by the State Data Agency, the monthly flows of immigrants and emigrants were reviewed, and, upon assessment of the duration of stay of migrants in Lithuania, short-term migrants were identified (the number of migrants includes only those who have been issued a temporary residence permit for a period of one year or more). Taking into account the preliminary annual statistics (net migration of Ukrainians stood at 57 thousand) and the number of Ukrainians who obtained registration with the Migration Department (72 thousand war refugees), 15 thousand short-term migrants from Ukraine were recorded in Lithuania last year, i.e. every fifth war refugee who arrived in Lithuania stayed temporarily.
The net migration balance of foreigners is record-high, mainly due to an influx of Ukrainians fleeing russian aggression.
Chart C. Foreign migration balance by nationality
Sources: State Data Agency and Bank of Lithuania calculations.
* Provisional data.
The integration of Ukrainians into the Lithuanian labour market continues to be successful, with more and more war refugees getting employed and the number of unemployed persons going down.
Chart D. Key indicators of integration of Ukrainian citizens into the Lithuanian labour market
Sources: Employment Service, Sodra, State Data Agency and Bank of Lithuania calculations.
Upon entering the Lithuanian labour market, war refugees from Ukraine mainly work as medium-skilled employees in the services and industry sectors. According to the Lithuanian Classification of Occupations, the majority of Ukrainians (68%) are employed as medium-skilled workers (such as drivers; builders; food processing workers, woodworkers, tailors and other related profession workers and craftsmen; personal service workers: cooks, waiters and bartenders, hairdressers, beauticians, etc.) and unskilled workers (24%) (such jobs include cleaners and helpers; unskilled extraction, construction, industrial and transport workers; food preparation assistants, etc.) (Chart E). However, skilled workers have also supplemented the Lithuanian labour market (around 8% of employed Ukrainians), including specialists in business and administration, physical sciences and engineering, law, social sciences and culture, information technology (IT) and communication systems. The agricultural sector is the one where Ukrainians are employed least. Although the flow of war refugees from Ukraine to Lithuania has been declining recently, almost 4 thousand persons are still looking for work. By employing Ukrainians, employers are addressing the labour shortage problem in Lithuania, which can help narrow the gap between the demand for and supply of workers. While there is labour shortage in almost all activities, war refugees from Ukraine are contributing to the easing of labour market tensions. This is particularly evident in the fields of manufacturing and accommodation and catering. Although employers are currently able to address the labour shortage by hiring Ukrainians, it is not clear how long Ukrainians intend to stay in Lithuania.
War refugees from Ukraine are mainly specialised in the activities of the service sector, working as medium-skilled employees and are least employed in the agricultural sector.
Chart E. Ukrainians employed by the type of the employer’s main activities (top) and by main subgroups of occupations (data as of 6 February 2023) (bottom)
Sources: Employment Service, Sodra, and Bank of Lithuania calculations.
Notes: Names of economic activities are abbreviated; the main subgroups of occupations are prepared according to the Lithuanian Classification of Occupations.
5.External sector
Soaring prices of imported goods and services and high energy prices have led to a very large deficit in net exports of goods and services. Calculated at current prices and adjusted for seasonal and workday effects, in the second half of 2022, it amounted to €0.6 billion or 1.6% of GDP of the respective period. This was the biggest deficit in net exports of goods and services over the last decade. The main contributor to the deficit in net exports of goods and services was the particularly soaring prices of imported goods and services, which significantly outpaced the development of prices of exported goods and services. This development started in 2021, when import prices of goods and services rose by 10.8% and export prices only by 5.3%. The gap between the growth of prices of imported and exported goods and services widened further in 2022 and stood at 25.1% and 16.1% respectively. One of the main reasons for this price development was the high prices of raw materials and energy, especially in 2022. For example, the deficit in net exports of goods went up from 5.7% (in 2021) to 12.3% (in 2022), but taking the deficit, excluding trade in mineral products, the indicators fall to 0.8% and 1.4% respectively. However, the decline in energy prices observed in recent months and the slowdown in expansion in global activity suggest a narrowing of the gap in price developments between Lithuania’s imports and exports of goods and services and a stabilisation of the deficit in net exports of goods and services. The projected this year’s increase in export prices for goods and services stands at 4.4% and that for import prices at 1.3%, while the projected increase for 2024 is 2.2% and 1.5% respectively.
The deterioration in the net exports of goods and services balance in recent years has been driven by particularly high commodity and energy prices.
Chart 9. Developments in net exports of goods and services, adjusted for seasonal and workday effects
Sources: State Data Agency and Bank of Lithuania calculations.
In the second half of 2022, Lithuania’s exports of goods and services, in terms of both value and volume, were the highest since the start of data publication. They were particularly high in the third quarter of last year but declined markedly in the fourth quarter. The main contributors to this development in export value were both bigger export volumes and higher selling prices. The increase in the value of services exports was only due to price changes. Overall, the volume of services exports has remained broadly stable since the beginning of 2021. This development in services exports is mainly due to difficulties in transport activity. This activity during the aforementioned period was negatively affected by the sanctions imposed on russia and Belarus and the entry into force of the EU Mobility Package, as well as by difficulties in acquiring trucks as a result of supply chain disruptions. This led to a significant drop in the volume of freight transported, for example freight turnover measured in tonne-kilometres was 14.1% lower in the first three quarters of 2022 than in the corresponding period of 2021. Furthermore, the development of exports of goods and services was adversely affected by the loss of price competitiveness due to high energy prices and by reduced foreign demand. The latter has been driven mainly by the sluggish growth in the economies of Lithuania’s main trade partners where domestic demand was severely constrained by soaring prices, the tightening of monetary policy and uncertainty about the course of russia’s war in Ukraine. The rate of growth of demand for goods and services exported by Lithuania is expected to be noticeably lower this year than in 2022. The demand is expected to be particularly weak in the first half of the year, before recovering slowly from the second half of the year. Together with the weak last quarter of last year, this will lead to a notably slower growth of Lithuanian exports of goods and services priced at constant prices. It is projected to stand at 1.7% this year and 4.7% next year.
In the second half of 2022, Lithuanian exports of goods and services were at their highest level since the start of the data publication, but the loss of price competitiveness due to high energy prices and declining foreign demand led to a particularly weak performance in the fourth quarter.
Chart 10. Developments in nominal exports of goods and services
Sources: State Data Agency, Bank of Lithuania and Bank of Lithuania calculations.
Amid energy prices at historic highs, Lithuania’s exports of goods fell significantly in the fourth quarter of 2022.
Chart 11. Developments in nominal exports of goods, adjusted for seasonal and workday effects
Sources: State Data Agency and Bank of Lithuania calculations.
Lithuania’s current account deficit narrowed slightly in the third quarter of 2022 but remained one of the highest since the global financial crisis. In the third quarter of 2022, as for the rest of the previous year, the current account deficit was mainly pushed up by the deficit in trade in goods. The particularly strong increase is due to higher prices of energy resources. As mentioned above, the balance of trade in goods, excluding mineral products, did not show a significant widening of the deficit last year and remained at a similar level as in 2021. The impact of the other components of the current account balance on the overall balance changed slightly. The balance of trade in services continues to show a slight decline in the surplus of trade in transport services which is being replaced by a widening surplus of trade in other services. The secondary income balance is still close to a balanced one, amid a significant decline in flows of personal transfers from abroad. The level of the primary income balance remains largely unchanged, due to dividends paid to foreign investors by business entities operating in Lithuania and reinvestments made. The current account deficit is projected to decline to 2.5% this year and remain at a similar level in 2024.
The significant widening of the deficit of trade in goods led to the largest current account deficit since the global financial crisis.
Chart 12. Components of the current account balance
Sources: State Data Agency,
Bank of Lithuania and Bank of Lithuania calculations.
6.Prices
Amid the fall of prices of energy resources in the markets and the alleviation of inflationary pressures driven by prices of other commodities, annual inflation in Lithuania has been declining steadily. After reaching its peak of 22.5% in September 2022, annual inflation stood at 17.2% in February this year (Chart 13). The slowdown in energy price growth was the main contributor to the decline in inflation. The impact on inflation of fallen prices of energy resources, food and other commodities such as metals is expected to strengthen. Along with the higher comparative base effect, annual inflation should continue to decline. Average annual inflation is projected to stand at 9% this year.
A drop in inflation in Lithuania is mainly driven by the weakening impact of energy prices on inflation.
Chart 13. HICP inflation and its contributions
Sources: State Data Agency and Bank of Lithuania calculations.
Note: Core inflation does not include the prices of most volatile components, such as energy and food, including alcohol and tobacco.
The impact of cheaper heat energy on annual inflation fell down by 2.6 percentage points from its peak in September.
Chart 14. Contribution of administered prices to annual headline inflation
Sources: State Data Agency and Bank of Lithuania calculations.
Food prices, including alcohol and tobacco, are the main contributor to inflation.
Chart 15. Impact of food, including alcohol and tobacco, on annual inflation
Sources: State Data Agency and Bank of Lithuania calculations.
Against the backdrop of falling in core inflation, headline inflation is also going down, but at a slower pace (12% in February and 12.7% at its peak in November). The growth of services, which is one of the components of core inflation, has reached its peak, with an annual growth rate of 12.5% in February (14.6% at the peak in November). The weakening growth in the prices of services in recent months has been strongly influenced by a base effect-triggered decline in the growth of rental and travel prices, which stood at 16.7% and 14.8% respectively in February. The growth in prices of catering services, which constitute a large part (4.2%) in the consumer basket, also went down in February, rising at an annual rate of 19.1% in February compared to 19.9% in January. Price growth in industrial goods, another component of core inflation, remained broadly unchanged at 11.7% in February, supporting core inflation. This is triggered by the rise in producer output prices which is still more rapid than that of the prices of final consumer goods. The pressure from the production chain is gradually easing. In the middle of last year, producer output prices for manufacturing, excluding refined petroleum products, on the domestic market rose at an annual rate of more than 32% and were 17.6% higher in February than a year ago. Taking another step back along the production chain and looking at the price growth of imported intermediate goods, the same trends can be observed – annual growth is weakening. The peak in industrial commodity price growth is therefore likely to have been reached in January.
In the second half of 2021, food prices started to rise faster both in Lithuania and across the EU. Annual food price growth in Lithuania had been following the upward trend, reaching its peak of 34.7% in November 2022. Although annual food price growth has moderated in February 2023, food prices, including alcohol and tobacco, remain the main driver of inflation. Food price growth has been strongly influenced by significant increases in the farm-gate prices of food commodities and a surge in energy prices. In 2022, farm-gate prices for agricultural products in Lithuania were on average 46% higher than a year ago, while electricity prices were about 2.5 times higher than the average electricity prices in 2021. This Box provides the analysis of food prices through cost and price developments in the key sectors of the food supply chain – agriculture, food industry and trade. The results of the analysis will allow to assess whether costs and prices have risen at similar rates in each of these sectors. The food price analysis is carried out following two approaches: business structure and financial indicators and input-output tables.
Most of food producers’ costs are made up of raw materials and materials (Chart A). According to the latest data as at 2021, food producers spend around 60% of their total production costs on these goods. Staff costs (14%) and purchased services (13%) also account for a significant share of the costs. Goods and services for resale and energy goods account for a smaller share of the costs but are also an integral part of the costs of production. The structure of costs of food producers is relatively stable and changes slightly in terms of time. The main change between 2015 and 2021 was in the share of the costs of raw materials and materials in the overall cost structure, which shrank by around 5.3 percentage points. Meanwhile, the share of purchased services and wage costs in the overall cost structure expanded by 3.4 and 2.7 percentage points respectively.
Expenditure on raw materials and materials account for most of the costs of food producers.
Chart A. Structure of food producers’ production costs*
Sources: State Data Agency and Bank of Lithuania calculations.
* Bank of Lithuania estimate.
In recent years, the prices of raw materials and materials as well as energy prices increased the most for food producers (Chart B). This was determined by assessing the price growth of each cost element. For some costs, such as heat, fuel, electricity prices or wages, increases could be measured directly. For example, the development of electricity prices was assessed on the basis of data from the Nord Pool exchange. And for some other costs, growth was calculated as a derivative indicator, e.g. the development of prices of raw materials and materials was calculated as a relative change in the weighted average of the farm-gate prices of food commodities and prices of imported food. It is estimated that in the third quarter of last year, raw materials and materials were roughly half as expensive as in the same period a year ago, while electricity was almost four times as expensive, and heat energy was twice as expensive.
Prices of raw materials and materials as well as energy went up the most.
Chart B. Development of food producers’ production costs
Sources: State Data Agency, Nord Pool and Bank of Lithuania calculations.
Production costs in the food industry were rising faster than prices of producers’ output sold. An assessment of the cost structure of food producers and the price increases for each cost element let to the finding that food producers’ costs increased. Rising prices of raw materials and products were the main contributors to the rise in food producers’ costs (Chart C) – in the third quarter of 2022, this accounted for more than two-thirds of the total increase in costs. While electricity costs represent a relatively small share of the overall cost structure of food producers, the impact of electricity prices on food producers’ costs increased as a result of the sharp rise in their prices on the market – this accounted for more than a tenth of the total increase in costs in the third quarter of 2022. The assessment of the likely growth of food producers’ costs led to the finding that, amid the stronger rise in food commodity prices, food producers’ costs went up faster than food producers’ output prices as of 2021.
Increases in the food industry’s production costs were larger than in prices of output sold.
Chart C. Developments in food producers’ costs and output prices
Sources: State Data Agency, Nord Pool Exchange and Bank of Lithuania calculations.
The value of goods for resale accounts for the major share of food merchants’ costs (Chart D). According to the latest data as at 2021, merchants allocate over 77% of their total costs to these goods. As in the case of food producers, staff costs (11%) and costs of purchased services (8%) comprise a sizeable share of costs for food merchants. No more than 2% of expenditure is allocated to other cost elements. The cost structure of food merchants, like that of food producers, shows little change over time. The main change between 2015 and 2021 was in the share of purchased services in the cost structure, which shrank by 1.8 percentage points. Meanwhile, the share of staff costs and other expenses in the overall cost structure grew by 1.3 and 0.6 percentage points respectively. The assessment of price increases for each cost element led to the conclusion that food merchants, like food producers, have recently experienced the highest annual increases in energy prices. Meanwhile, the prices of food for resale, which account for most of the costs, were one-third higher in the third quarter of 2022 than in the same period a year ago.
The bulk of food merchants’ costs is comprised of costs of goods for resale.
Chart D. The structure of food merchants’ costs
Sources: State Data Agency and Bank of Lithuania calculations.
* Bank of Lithuania estimate.
Food merchants’ costs and food prices for consumers have increased at a similar pace (Chart E). Most of the increase in food producers’ costs (more than two-thirds) in the third quarter of 2022 was due to rising prices of goods for resale. As with food producers, rising electricity prices also contributed significantly to increases of costs of food merchants. Although electricity costs represent a relatively small share of total costs, the almost four-fold year-on-year increase in electricity prices in the third quarter of 2022 contributed to around a tenth of the cost growth in that quarter. The assessment of the likely development of food merchants’ costs led to the finding that the rise in food merchants’ costs and food prices to consumers followed a similar pattern over the whole analysis period. Specifically, in the third quarter of 2022, food merchants’ costs were expected to have grown at an annual rate of 33%, while food prices for consumers were expected to have risen at an annual rate of 30%.
The rise in food merchants’ costs and food prices to consumers followed a similar path.
Chart E. Development of food merchants’ costs and food prices to consumers
Sources: State Data Agency, Nord Pool Exchange and Bank of Lithuania calculations.
Analysis of food prices on the basis of input-output tables
The input-output tables (IOT) enable to analyse the interrelationships between input and output of 65 economic activities (product groups) (in accordance with the Nomenclature of Economic Activities (NACE)), as well as to assess the share of intermediate consumption products that are purchased by specific activities from Lithuanian producers, and the share thereof that is imported. Supplementation of this information with the price indices published by the State Data Agency makes is possible to assess how the prices of goods and services purchased by the 65 economic activities/product groups have evolved, and what impact this may have had on the final price of the output of the selected economic activities – agriculture, food industry and retail trade.
Lithuania’s food supply chain relies heavily on products produced in Lithuania – goods and services account for around two-thirds of the cost of food products. The structure of the outputs products produced by food supply chain activities shows that in agriculture and the food industry, intermediate consumption products – the goods and services used to produce the outputs – account for around two-thirds of the output prices. This is significantly more than the broad indicator of Lithuania’s economy, which averaged 48% in 2004–2021. At the same time, compared to the country’s average, the final output prices of these activities are noticeably more dependent on the development of prices of the goods and services used in production, and less dependent on the wages paid to staff or on the profits generated by companies.
A more detailed analysis of the data for 2015 shows that four categories of goods determine around 40% of the total intermediate consumption expenditure in agricultural activity: energy costs account for around a tenth of the total output price, a similar share rests with products produced in the chemical industry (e.g. fertilisers) and with food, beverages and tobacco products (e.g. animal feedstuffs), and a further 13% are attributed to agricultural products (e.g. vegetables or grain used for feeding livestock). Two thirds of the goods and services used in agricultural activity are produced in Lithuania.
The structure of intermediate consumption in the food industry is even more concentrated. In 2015, agricultural products accounted for almost 40% of intermediate consumption expenditure (equivalent to 30% of the final output price), another 17% was accounted for by products purchased from other food industry companies (e.g. flour for baking bread) and 7% by fishery products. These three groups of goods accounted for almost two-thirds of the food industry’s intermediate consumption expenditure, and most of them were purchased from Lithuanian producers. Overall, the food industry purchased 80% of goods and services for intermediate consumption from Lithuanian producers. At the same time, it should be noted that energy and fuel costs were not particularly important for this activity in 2015 as they accounted for only 3% of intermediate consumption expenditure.
Retail activities require a special emphasis. Due to specificities of compilation, goods for resale are not attributed to the intermediate consumption expenditure of retail trade in IOT. In terms of business structure and financial indicators, they account for almost 80% of total expenditure of retail trade. However, even with this drawback, the data presented in IOT is useful as it enables to analyse the development of operation costs of retail trade as well as changes in the structure of added value.
Lithuania’s food supply chain relies heavily on products produced in Lithuania – goods and services account for around two-thirds of the cost of food products.
Chart F. Cost structure of key activities in the food supply chain*
Sources: State Data Agency, Eurostat and Bank of Lithuania calculations.
* Agriculture corresponds to the activities listed in NACE as crop and animal production, hunting and related service activities (code A.01), food production – manufacture of food, beverages and tobacco (C.10-12), retail trade – retail trade, except of motor vehicles and motorcycles (G.47).
Since 2021, the increase in the prices of goods and services used in agricultural production has been markedly lower than the increase in the various price indices for agricultural output.
Chart G. Dynamics of agricultural production expenditure and farm-gate (product sale) prices
Sources: State Data Agency, Eurostat and Bank of Lithuania calculations.
Since 2021, input prices in the food industry have risen at a similar level as the prices of food products produced by the food industry and sold on the Lithuanian market.
Chart H. Development of production costs and output prices in the food industry
Sources: State Data Agency, Eurostat and Bank of Lithuania calculations.
Since 2021, operating cost prices of retail trade have risen similarly as food prices for consumers in Lithuania. Retail trade’s operating cost prices started to grow notably earlier than the rise in food prices for Lithuanian consumers became more pronounced.
Chart I. Development of retail trade’s operating costs and food prices
Sources: State Data Agency, Eurostat and Bank of Lithuania calculations.
During the period under review, exceptionally high levels of return on equity have not been observed in activities relevant to the supply of food products (Chart J). Compiled estimates of the changes in individual production structure elements of the activities relevant to the supply of food products and the changes in the prices of the products sold by the respective activities also make it possible to evaluate the changes in the value added structure between the share of value added falling on staff and the return on equity (operating surplus and mixed income). In agricultural activity, these estimates show that in the first three quarters of 2022, the share of agricultural return on equity in value added was higher than the long-term average, due to a sizeable increase in the prices of agricultural products throughout the euro area. However, this increase is not exceptional, its deviation from the long-term average is not greater than one standard deviation, i.e. the limit up to which the fluctuations are considered a typical variation determined by the specifics of the activity. The situation is different in the food industry and retail trade, where the share of return on equity in added value significantly decreased over the analysed period. In the third quarter of 2022, the share of return on equity in the added value of both activities was more than one standard deviation below the long-term average. This suggests that the share of return on equity in added value for these activities is atypically low and should come closer to the long-term average in the future.
No exceptionally high levels of return on equity were observed in activities relevant to the supply of food products.
Chart J. Development of the share of operating surplus* in value added (2004-2020) and calculated estimates (Q1 2021–Q3 2022)
Sources: State Data Agency, Eurostat and Bank of Lithuania calculations.
* The indicator covers the following national accounts data series: operating surplus and mixed income (national accounts code B2A3N), other subsidies (D.39) and other production taxes (D.29).
** Agriculture corresponds to the activities listed in NACE as crop and animal production, hunting and related service activities (code A.01), food production – manufacture of food, beverages and tobacco (C.10-12), retail trade – retail trade, except of motor vehicles and motorcycles (G.47).
In conclusion, the analysis carried out on the basis of business structure and financial indicators and IOT showed that prices in the food industry and food trade sectors are likely to have risen at a similar pace as costs. In agriculture, prices rose slightly faster than costs. The development of prices of agricultural products was significantly affected by market patterns in the euro area. Furthermore, no exceptionally high levels of return on equity have been observed in activities relevant to the supply of food products over the period analysed. In the view of the Bank of Lithuania, food inflation will slow down but will not be equivalent to the decrease in energy costs due to the gradualism of the transmission of costs to prices and the effects of other cost components.
Price developments in Lithuania were dramatic in 2022 after the COVID-19 pandemic and the russian invasion of Ukraine. In this box, we explore two perspectives on the relationship between costs and food price inflation. First, we examine the contribution of global energy shocks to changes in consumer food price inflation between the first quarter of 2003 and the fourth quarter of 2022. Second, we assess how changes in costs, such as input prices or wages, generally affect food prices at different stages of production and distribution in recent decades.
In both analyses, we rely on estimates from vector autoregressive models (VAR). These models assume that each variable observed at time t, e.g. food inflation, depends on its past observations and those of the other variables in the model, e.g. the unemployment rate, up to a specified time lag. Each VAR model is of the following form:
, (Equation 1)
where a system of equations is defined as the number of variables (time-series) in the model. is the time lag, is a vector of observables, is a vector of constants, is a matrix of coefficients, and is a vector of unobserved exogenous shocks (residuals unexplained by the model), and is assumed to be a zero mean white noise, . These shocks enable us to assess the impact of cost changes on food inflation. Indeed, any covariance stationary VAR model has a moving average representation as follows:
(Equation 2)
where is a deterministic term, are coefficients, the contemporaneous relations between the variables, and the structural shocks. In simple terms, this means that any variable in the model can be decomposed into a deterministic term (i.e. a long-run expected value) and stochastic components (i.e. the sum of structural shocks).
In our first analysis, we find that the contribution of energy shocks explains the lion’s share of food inflation since 2015 in Lithuania (Chart A). These shocks are identified using year-over-year energy, core, and food inflation and wage inflation as well as unemployment rates in levels between the first quarter of 2003 and the fourth quarter of 2022. Specifically, in the first three quarters of 2022, energy shocks explain over 80% of the fluctuations in consumer food inflation (beyond the deterministic term).
For comparison, we estimated a VAR model for the euro area with the same period, the same variables, and the same parameterisation. Energy shocks contributed less to food inflation in the euro area (Chart B). Notably, they only explain about 50-60% of its variation in the first three quarters of 2022.
Chart A. Historical decomposition of consumer food inflation (year-over-year) in Lithuania
Sources: Eurostat, State Data Agency and Bank of Lithuania calculations.
Note: The decomposition is based on the estimation of a VAR with 5 lags, and data between the first quarter of 2003 and the third quarter of 2022. The black line indicates the annual food inflation growth. The stacked bars indicate the contribution of different model shocks and deterministic components to the evolution of food inflation growth.
Chart B. Historical decomposition of consumer food inflation (year-over-year) in the euro area
Sources: Eurostat, State Data Agency and Bank of Lithuania calculations.
Note: The decomposition is based on the estimation of a VAR with 5 lags, and data between the first quarter of 2003 and the third quarter of 2022. The black line indicates the annual food inflation growth. The stacked bars indicate the contribution of different model shocks and deterministic components to the evolution of food inflation growth.
Chart C. Median response to an energy shock
(Lithuania compared to the euro area; quarterly impulse-response reactions)
Sources: Eurostat, State Data Agency and Bank of Lithuania calculations.
Note: Median impulse responses of model variables (and 68% credibility interval) to an energy shock that produces a 1 percentage point change in year-over-year energy inflation on impact. The X axis shows the quarters following the shocks, and the Y axis the percentage point changes for each variable.
In our second analysis, we assess how cost changes transmit to food inflation along the production and distribution channels. To do so, we run multiple bi-variate VAR models (as in equation 1) extracting different cost shocks (such as on wages or purchase prices, see below) and estimate their impact on producer and consumer food inflation. Data are monthly, except for wages, which are only available quarterly. Analysis periods vary from 1997 to 2022 depending on data availability.
Table A summarises the results of the models involving producer food inflation. Each shock in the first column is set to increase the corresponding cost by 1 percentage point. On impact, the shocks produce different effects on food inflation (column 2). The increase in food prices is relatively small after an energy or materials purchase disruption, whereas it is relatively large in the face of wage or food import shock (about half of the cost change is directly transmitted to food inflation in the latter cases).
Table A. Median response of producer food inflation to cost changes
|
Shock of: |
Impact (percentage points) |
Maximum (percentage points) |
Horizon (month) |
Pass-through (percentage points, 5 years) |
|
Energy prices (01/1999-10/2022) |
0.04 |
0.48 |
15 |
0.52 |
|
Imported agricultural good prices (01/2007-10/2022) |
0.09 |
0.31 |
7 |
0.7 |
|
Imported food prices (01/2007-10/2022) |
0.46 |
2.18 |
11 |
1.21 |
|
Purchase prices raw material average (01/2011-10/2022) |
0.11 |
0.57 |
12 |
0.81 |
|
Wages (Q4 2001-Q3 2022) |
0.4 |
0.62 |
9 |
0.58 |
Sources: Eurostat, State Data Agency and Bank of Lithuania calculations.
Note: Each row represents the estimates of a bi-variate VAR model in which the first column gives the variable (year-over-year) used to extract cost shocks. The second variable in the model is always the year-over-year producer inflation rate. “Impact” shows how a shock causing a 1 percentage point change in cost varies producer inflation in the same period following the shock. “Maximum” is the maximum impact on producer inflation that the shock creates over time, and “horizon” is the month in which it occurs. “Pass-through” indicates the extent to which the 1 percentage point change in cost passes through to producer inflation after 5 years.
Table B presents the results of the models involving consumer food inflation. Likewise, each shock in the first column is associated with a 1 percentage point increase in the corresponding cost. When the shock hits, changes in cost prices have a modest effect on consumer price inflation (column 2). The largest effect is due to wage shocks, in which case the change in food inflation is 0.3 percentage points in the same quarter. This slow diffusion of costs into prices is also due to the reasons outlined above. Indeed, the maximum impact of these shocks occurs after about one year (magnitude in column 3, horizon in column 4). Finally, as in the case of producer prices, there is an overreaction of food inflation to imported food price shocks (column 5).
Table B. Median response of consumer food inflation to cost changes
|
Shock of: |
Impact (percentage points) |
Maximum (percentage points) |
Horizon (month) |
Pass-through (percentage points, 5 years) |
|
Energy prices (01/1997-10/2022) |
0.02 |
0.43 |
19 |
0.57 |
|
Imported food prices (01/2007-10/2022) |
0.18 |
1.77 |
13 |
1.2 |
|
Purchase prices of agricultural products (01/1999-10/2022) |
0.27 |
1.02 |
10 |
0.9 |
|
Wages (Q12001-Q3 2022) |
0.3 |
0.59 |
15 |
0.82 |
Sources: Eurostat, State Data Agency and Bank of Lithuania calculations.
Note: Each row represents the estimates of a bi-variate VAR model in which the first column gives the variable (year-over-year) used to extract cost shocks. The second variable in the model is always the year-over-year consumer inflation rate. “Impact” shows how a shock causing a 1 percentage point change in cost varies consumer inflation in the same period following the shock. “Maximum” is the maximum impact on consumer inflation that the shock creates over time, and “horizon” is the month/quarter in which it occurs. “Pass-through” indicates the extent to which the 1 percentage point change in cost passes through to consumer inflation after 5 years.
The surge in food price inflation in 2022 has raised many questions in Lithuania. This box provides an assessment of the impact of cost changes on the evolution of food prices over the past decades. According to the models, Lithuania is generally more exposed to energy shocks than its euro area peers, which ultimately results in a larger impact on prices (and the real economy). In 2022, we find that these types of shocks explain most of the variation in consumer food price inflation. More generally, the diffusion of cost shocks spreads gradually over time. This information is crucial because it signals to policymakers that they have sufficient time before the maximum impact of these shocks materialises.
7.Financing of the economy
Net financial assets of households and firms grew despite a sharp increase in financial liabilities, but the continued uncertainty about the economic outlook and rising interest rates may reduce demand for further borrowing. In the third quarter of 2022, the financial liabilities of Lithuanian residents amounted to €18.1 billion and increased by 19.9% in six months (annual growth of financial liabilities of households stood at 29.1%). The main contributor to the overall increase in household’s liabilities was a significant increase in financing from MFIs, with the amount of loans held by households in the third quarter of 2022 being 12.4% higher than a year ago. In the period under review, financial liabilities of non-financial corporations increased by 6.1% in half a year and amounted to €60.7 billion (annual growth of firms’ financial obligations equalled 21.7%). Financing of companies with short-term loans grew significantly – the latter was mainly due to a sizeable increase in peer-to-peer lending. Current liabilities of companies grew faster than current assets, but the growth of their total financial assets, especially unlisted shares, was stronger than that of their total liabilities (€12 billion and €10.5 billion respectively), therefore, net financial assets of companies grew by 15.1% in the third quarter of 2022. In the third quarter of 2022, compared to the corresponding quarter of the previous year, financial assets of households grew stronger than their liabilities, resulting in a 3.9% increase in net financial assets (the difference between financial assets and liabilities). Borrowing needs of households and businesses are likely to be dampened by rising interest rates and continuing high uncertainty about further economic developments.
MFI lending to non-financial corporations and households declined amid the continued uncertainty and rising interest rates.
Chart 16. Flows of MFI loans to NFCs and households
Source: Bank of Lithuania.
While the annual portfolio growth of loans granted by MFIs to households was still historically strong in the fourth quarter of 2022, the contraction in housing and consumer loan flows signalled a slowdown in lending. Quarterly flow of new MFI loans to households decreased by 9.4% in the fourth quarter of 2022 (Chart 16). A 11.2% decrease in the flow of new housing loans in the last quarter of 2022 was the main contributor to this. While the annual growth rate of the household loan portfolio stood at 11.6% in December 2022 (Chart 17) and still significantly exceeded the euro area average of 3.7%, there were more and more signs that the credit cycle had already reached its peak. In September to December 2022, annual housing price growth slowed down, while month-on-month changes in the index pointed to price stabilisation. The higher interest rates on new housing loans, which continued to be the highest (4.4%) in the euro area in December 2022, contributed significantly to this. Higher borrowing costs weighed on the demand for housing loans which in the fourth quarter of 2022 was at its lowest level since the financial crisis. Borrowing incentives were also dampened by deterioration in expectations – the majority of surveyed RE market participants expect price stabilisation or a slight (5-10%) decrease in prices over the coming year. At the same time, as interest rates rise, the Responsible Lending Regulations have become more restrictive, reducing the maximum possible loan amount. The latest consumer survey results show that the willingness of households to make larger purchases is currently quite close to the lowest level since the start of data publication. In this environment, the flow of loans granted for consumption and other purposes in the last quarter of 2022 decreased by 4.7%, and the annual growth rate of the portfolio of these loans in December 2022 fell to 6% (it was 10.7% in September, Chart 17). Therefore, although the growth of the portfolio is still supported by the credit granted for increasing energy efficiency and furnishing housing, lending is gradually slowing down. Further consumer lending patterns will also be affected by the fact that, according to the banks, these loans will be subject to greater tightening of lending standards compared to other credit segments.
The annual portfolio growth rate of MFI loans for housing and to non-financial corporations in the fourth quarter of 2022 were still at record highs, while the consumer loan portfolio started to grow more slowly.
Chart 17. Annual growth of the portfolio of MFI loans granted to NFCs and households
Source: Bank of Lithuania.
The portfolio of loans granted by
MFIs to non-financial corporations in the fourth quarter of 2022 was still
expanding at a historically high annual rate, but the reduced demand for
investment loans and rising interest rates (5% in December 2022) reduced demand
for new corporate loans. In the fourth quarter
of 2022, the quarterly flow of MFI loans to companies already lagged behind the
quarterly average of 2022 (Chart 16). In addition, while the average loan value
was still 14% above the average of 2022 in the period referred to above, the
number of loans granted went down by 5.6%. The annual growth rate for corporate
loan portfolio still stood strong in December (17.7%, Chart 17) and remained
the strongest in the euro area, exceeding the average of 5.5%. Notably, due to
high inflation, corporate borrowing from MFIs remains at a relatively high
level, but it should be noted that credit institutions’ lending to companies
did not exceed nominal economic growth. However, at the same time, companies
increased their mutual short-term liabilities very rapidly (in the third
quarter of 2022, short-term peer-to-peer loans increased by €2.4 billion or
146% year on year, amounts payable by €2.1 billion or 121%, and trade credits
by €2.4 billion or 9%). Companies also borrowed more from abroad (18% year on
year in the third quarter of 2022) and issued more debt securities (5% year on
year in the third quarter of 2022). Including the latter sources, the annual
growth of corporate credit in the third quarter of 2022 was as much as 31% and
outpaced economic growth for the third consecutive quarter. Regardless of this,
the risk of long-term imbalances is low – the need for borrowing by companies
can be expected to be dampened by more expensive borrowing, declining inflation
(especially falling energy prices) and postponed investment. Expectations have
particularly deteriorated in the industrial sector, where the semi-annual
contraction in loan flow was recorded at 49% in December 2022. According to the
results of the Bank of Lithuania’s survey of banks, corporate borrowing should
also be dampened by tightening lending standards, especially for small and
medium-sized businesses and longer-term corporate loans.
8.General government finance
General government revenue growth was driven by strong domestic demand, the collection of previously deferred taxes and a rapid rise in price levels.
Chart 18. Annual changes in general government revenue and contributions
Sources: State Data Agency and Bank of Lithuania calculations.
General government spending has risen mainly due to additional expenditure-increasing decisions enshrined in the Law Amending the Budget for 2022.
Chart 19. Annual changes in general government expenditure and their contributions
Sources: State Data Agency and Bank of Lithuania calculations.
The strong growth in general government revenue throughout the year and expenditure that accelerated only in the second half of the year led to the ratio of the general government balance to the four-quarter GDP standing at 0.9% in the third quarter of 2022, which was significantly better than a year ago. The full set of quarterly data for 2022 will not be available until the end of the first quarter of 2023, but the currently available data suggest that the ratio of general government deficit to GDP will not be higher in 2022 than the level recorded in 2021 (-1.0%).
The general government debt-to-GDP
ratio was significantly lower in the third quarter than a year ago and stood at
37.3%. The debt ratio declined temporarily by
2.3 percentage points over the quarter, driven by the September redemption of
the securities issue, as well as a possible slight reduction in the need for
borrowing due to the surplus. However, this reduction is temporary, as there
was a placement of bond issue worth €1.3 billion on foreign markets in October,
therefore, the general government debt-to-GDP ratio is likely to revert close
to 40% by the end of 2022, but to remain one of the lowest among EU countries.
Abbreviations
APP asset purchase programme
EC European Commission
ECB European Central Bank
EU European Union
EURIBOR Euro Interbank Offered Rate
Eurostat Statistical Office of the European Union
Eurosystem European Central Bank and central banks in the euro area
GDP gross domestic product
HICP Harmonised Index of Consumer Prices
IMF International Monetary Fund
MFI monetary financial institution
RE real estate
UK United Kingdom
US United States of America
VAT value added tax
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© Lietuvos bankas Gedimino pr. 6, LT-01103 Vilnius The Lithuanian Economic Review analyses the developments of the real sector, prices, public finance and credit in Lithuania, as well as the projected development of the domestic economy. The material presented in this review is the result of statistical data analysis, modelling and expert assessment. The review is prepared by the Bank of Lithuania. The cut-off date for the data used in the publication is 16 March 2023. Reproduction for educational and
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