2024-08-01 11:55:44
Let me remind you that in the first quarter of this year, the real gross domestic product (GDP) growth reached 0.8 percent. Compared to the corresponding quarters of the previous year, economic growth in the second quarter of this year reached 1.4 percent, and in the first quarter – 2.9 percent. Maybe it’s really worth celebrating and announcing that we managed to avoid the troubles that are still plaguing other countries and the country’s economic growth will now only move forward without any disturbances. However, I suggest that you assess whether this is a sustainable result and what traffic light is on in the future: optimistic green, restrained yellow or ominous red.
Because there are some very big “BUTs” that can become serious obstacles to great optimism.
The first BUT
Although all the economies of the euro zone and the European Union (EU) grew by 0.3 percent in the second quarter of this year. (as well as in the first quarter of this year), the situation in other eurozone countries is very complicated.
I have already written many times that the core of our exports is Germany. Its economy is still contracting (0.1 percent). In the second quarter of this year, the economies of Sweden (0.8%), Hungary (0.2%), and Latvia (1.1%) shrank. Similarly, as in Lithuania, the economy grew only in Spain (0.8%). So in the context of the Eurozone, we are so far more the successful exception than the rule.
The complexity of the situation is confirmed by the worsening expectations of the Eurozone industry (measured using the Purchasing Managers’ Index). Among other things, the expectations of the service sector, which were worse in June than in May, started to weaken.
The second BUT
At that time, industrial companies face a double challenge. The first is unceasing salary growth. This has become the main headache of the European Central Bank (ECB) for some time now, because wages in the euro zone are still growing by around 4 percent. This is not a neutral rate of wage growth to contain inflationary growth. Here we are in Lithuania, we cannot stop and we are considering a 12 percentage point increase in MMA (trade unions offer even 18%), and no one here misses the economic logic?
The second challenge: foreign trade is not recovering (low or no income growth), commodity prices are not rising or even falling. So where to get money and how to pay the rising salaries, and at least some kind of investments? And they are not needed “at least some”, but very serious, because both in the EU and throughout the world, the need for the fastest possible transformation and changes in energy resources is growing.
The third BET
Meanwhile, demand in export markets is still not recovering and there is no light at the end of the tunnel. Why? Because protectionism in international trade (including trade in scarce resources) is on the rise. The trade war with China is heating up. There is little stability in orders (they are one-off, short-term and in smaller quantities than usual).
Across the euro area, companies are borrowing slightly more than at the beginning of the year, but short-term borrowing dominates, with long-term investment still being postponed.
This is not helped by the ongoing era of high interest rates, the peak of which we may have reached, but there is no rush to get off the mountain. Both the ECB and the Fed are still exhibiting an extremely restrained, cautious stance.
So – conclusions
Is this really an economic recovery? I would not rush to make predictions.
So far, our success is more based on optimistic population expectations and recovering consumption. Unfortunately, those expectations of the population are growing on the unsustainable basis of expecting exaggerated salaries. Money is scarce, if we spend it all on salaries (I agree, it sounds great in an election year), we will have nothing to invest. Because borrowing is extremely expensive.
If we do not invest, we will have neither growing labor productivity nor competitive prices. We will not have competitive prices – exports will stagnate. We will not earn additional money when we start exporting and we will have to stop raising wages. The vicious circle will close: the expectations of the population will deteriorate and consumption will fall again.
So while there is a yellow light on the world trade route, the probability that it will be followed by a green light is certainly no greater than that it will be red.
2024-08-01 11:55:44