Good news for Lithuanians
While presenting the latest economic forecasts, N. Mačiulis drew attention to the exceptional situation of Lithuania’s economy not only in the Baltic countries, but also in the Eurozone region.
“As expected, this year we see a rapid growth in the purchasing power of the population and already recovering retail trade. However, in contrast to many other European Union (EU) countries, Lithuanian industry is also recovering, almost all its branches are growing,” said N. Mačiulis.
Taking into account the noticeable differences, Swedbank increases this year’s growth forecast for Lithuania’s gross domestic product (GDP) and believes that it should increase by 2.2 percent. The growth forecast for next year remains unchanged – economic growth should accelerate to 2.8 percent.
It is true that the economic growth prospects of Latvia and Estonia in 2024-2025 are somewhat more vague. Economic growth forecasts for these Baltic countries are being reduced, Estonia’s – even 1 percent.
Speaking about the mood of the Lithuanian population, N. Mačiulis emphasizes an important indicator that also stands out in the context of EU countries. This year, for the first time in history, the expectations of Lithuanians regarding the prospects of their personal and the entire country’s economic situation are the best in the EU. As the economist notes, the high expectations of the Lithuanian population contribute to faster economic growth.
“This is due to very low inflation and fast growing wages,” the economist said.
However, you should not rejoice too early, because Swedbank predicts that the period of extremely low inflation will soon end and inflation will accelerate from 0.9 percent. this year to 2.8 percent. in 2025.
At that time, the growth of the average salary will slow down a little – it will reach 8.2 percent. and will be about three times faster than price growth. As N. Mačiulis observes, the average wage growth will remain the fastest among the Baltic countries next year.
What is holding back economic growth in the Eurozone?
Forecasting the further development of the Lithuanian economy, as noted by Swedbank CEO economist, it is important to remember that we are heavily dependent on the success of the Eurozone. Despite the recovering purchasing power of the Eurozone population, this year’s GDP growth in the region is still expected to be below 1%.
“Cyclical factors – high interest rates – and structural reasons, such as still relatively expensive energy and labor shortages, suppress the growth of the Eurozone,” Swedbank’s Chief Economist N. Mačiulis compares the regions.
The economist points out that the weak link remains the Eurozone industry, which is still not growing in many Eurozone countries and has fallen to its lowest level in a decade in Germany.
“The good news is that with inflation easing and employment and wages still growing strongly, the purchasing power of the eurozone population is recovering rapidly. However, the expectations of many residents regarding personal finances are lower than usual, so we have not yet seen a recovery in consumption – in the major eurozone countries, retail sales remain at approximately the same level as at the end of the last decade,” says N. Mačiulis.
The situation in the United States is also comparable – it is believed that the growth of the US economy this year will remain similar to last year and will reach about 2.5 percent.
“The US economy is still driven by the expansionary fiscal policy and the steady consumption of the US population. However, we are seeing more and more signs of a weakening labor market, an increasing unemployment rate, so the growth that has surprised us so far should come to an end,” said N. Mačiulis.
Swedbank economists predict that in 2025, the economies of both the US and the euro zone will grow at a similar pace – about 1.5 percent.
Faster reduction of interest rates is predicted
The ECB is expected to cut interest rates at least two more times this year, and by the end of 2025 the base interest rate will be reduced to 2 percent.
“Both in the US and the euro zone, inflation remains above 2 percent, but it is already low enough for central banks to ease monetary policy and lower interest rates more boldly,” N. Mačiulis believes.
However, attention is drawn to the fact that a further decline in inflation is not guaranteed. Tensions in the Middle East have already more than doubled the cost of shipping containers, prices of liquefied natural gas have also increased in recent months, and protectionist policies – higher import tariffs – may also heat up inflation.
“Inflation stuck at too high a level, which makes it difficult for central banks to reduce interest rates, is one of the main risks that can slow down the recovery of many countries.”
So far, many countries and sectors have been surprisingly resistant to high interest rates, but it was only a matter of time before the negative effects of tighter monetary policy took hold. Right now, the number of new bankruptcies in Germany has risen to the highest level in almost a decade, and in France it is the highest since 2009,” N. Mačiulis concluded.
SEB lowers the Lithuanian economic growth forecast
SEB Bank also shared the latest economic forecasts. This improves the GDP growth forecast to 2.4 percent, instead of the 1.5 percent previously predicted by the bank. According to the bank’s economist Tados Povilauskas, the better economic development result compared to a year ago was determined not only by the recovery of real household consumption, but also by stronger results of the industrial sector.
“We assume that the Lithuanian economy will grow more slowly in the third and fourth quarters – during the quarter GDP will increase by approximately 0.5 percent, or slower than in the first and second quarters, when the economy grew by 0.9 percent each. A slower quarterly GDP change will be determined by slightly slower growth in exports and household consumption. True, in the third quarter, 5-10 percent will have a positive impact on the economy. grain and rape harvest in Lithuania is higher than last year”, says T. Povilauskas.
However, SEB is reducing the 2025 Lithuanian economic growth forecast from 2.8 to 2.6 percent. According to T. Povilauskas, the main reason for this is the much faster than expected economic change this year and the increased comparative base as a result.
At that time, the average annual inflation, as predicted by SEB bankas, will be 1.2 percent this year in Lithuania, and it will increase to 3 percent next year. Annual inflation is said to have bottomed out in the spring, and inflation will gradually increase in the coming months, topping 2 percent in December.
“Inflation will increase because the impact of energy product prices that have fallen over the past year and a half on inflation will disappear. This will have a significant impact from 2025 onwards. January 1 increasing excise duty on diesel (from 41 ct/l to 46.6 ct/l) and the emerging CO2 component for gasoline (4.7 ct/l) and diesel (5.36 ct/l). Services will be more expensive than this year. We predict that the price of food products will increase by an average of 1.5 percent in 2025 after this year’s decline”, explained T. Povilauskas.
It is believed that the ECB will cut interest rates two more times this year, and five times next year. Also, the GDP of the euro zone should increase by 0.8 percent this year, and by 1.6 percent next year. At that time, according to SEB’s forecasts, the average annual inflation in the euro zone should be 2.5 percent this year, but it will decrease to 1.8 percent next year.
SEB analysts believe that the ECB will cut the base interest rates two more times this year, and the base interest rate for using the deposit facility (Deposit Facility Rate) will decrease from the current 3.75 to 3.25 percent. At the end of next year, the interest rate should be 2 percent.
2024-08-28 09:22:29