Lithuania forecasts its economy for 2022 and Ukraine war impact

The bank of Lithuania provided three different scenarios forecasting its economy in 2022. Inflation rate would increase twofold and annul the benefits of wage increases.

Bank of Lithuania building
Bank of Lithuania

The Bank of Lithuania forecasts its economy could grow by 2.7% but also decline by 1.2% in 2022 according to various scenarios studied. The inflation rate would be above 10%, twice as much as what was forecast in December.

Russia’s invasion of Ukraine will negatively affect Lithuania’s economy with declining exports, possible disruptions in imported raw materials, an uncertain environment for investment and rising energy prices, the Bank of Lithuania explained.

During Q4 2020-Q3 2021, exports to Russia accounted for 6% of Lithuania’s total exports, Belarus and Ukraine accounted for 3% each.

The impact remains somehow limited as Lithuania’s foreign trade with Russia has significantly reduced over the last decade. Moreover, most of the exports to Russia and Belarus were not Lithuanian goods but were more related to a transportation service trade, limiting the loss of added value. Most of the goods exported to Ukraine were made in Lithuania though.

Stopping all exports to these markets in 2022-2023 could lead to a loss of 3 percentage points in Lithuania’s gross domestic product.

Fifteen percent of Lithuanian imports came from these three countries, of which 44% was energy. In 2021, 20% of metal and 45% of timber imports came from Russia, Belarus, and Ukraine. A shortage of raw materials will affect Lithuania’s industry and energy price hikes will feed inflation.

Between a 2.7% growth and a 1.2% decline in Lithuania’s economy

Under the “conventional scenario” based on data from March 1, a week after the start of the war and before tougher sanctions the European Union applied to Russia and Belarus, Lithuania’s GDP would be expected to grow by 2.7% and inflation by 10.5% in 2022.

Lithuania’s economy grew by 4.8% in 2021. It was forecast to grow by 3.6% in 2022 last December.

Before the war, the economy of Lithuania was already affected by the COVID-19 pandemic and declining exports to China as a consequence of its Taiwan representative office in Vilnius.

In 2021, Lithuanian wages grew 10.5% on average, much higher than the 4.6% inflation rate, meaning the population was richer at the end of the year. Although the population would still have a similar wage increase, the inflation rate will likely completely annul its benefits for households.

In a second scenario, a more pessimistic one made with financial market information until March 17, the country’s GDP could grow by 0.4% and inflation by 10.5%. The volume of exports would decrease by two thirds and will suffer from a 10% shortage of raw materials coming from Russia, Belarus and Ukraine, with substitutes more expensive by a third. The deterioration of households and business confidence in the future would be similar to what was observed at the start of the COVID-19 pandemic or the global financial crisis in 2008.

But if there are no exports at all to these three countries and Lithuanian companies are unable to find 20% of raw materials imported from the three countries, the country’s GDP would decrease by 1.2% with an inflation of 11.1%.

These scenarios assume that hostilities would be limited to the territory of Ukraine, the Bank of Lithuania notes, despite some Lithuanian people fearing that Russia may also invade the country.

The recent flow of Ukrainian refugees may reduce Lithuania’s labor shortage if they stay on the long term and the unemployment rate may not increase much. However, the current situation and the highly unpredictable future make the assessment of Lithuania’s economic development “extremely difficult”.

As such, not a single scenario can be considered as the primary one, the bank said.

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Macroeconomi forecasts (March 2022), Bank of Lithuania, Free access

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