A worried look at what's happening in the economy: we're bracing ourselves for a big hit

A few weeks ago, we said goodbye to quarantine and its restrictions. Just when it looked like we might be able to party big, we were held back by the prices in cafés. In general, prices are starving. According to official information from the EU institutions and Lithuanian statisticians: we are the leading EU country in terms of inflation. According to EU data, inflation in Lithuania was 15.6% in March and 16.8% in April compared to the same period last year, according to the Lithuanian Statistics Department. Is this the result of the war in Ukraine, or is it also the result of our government?

A worried look at what's happening in the economy<br>Vlado Ščiavinsko nuotr.
A worried look at what's happening in the economy<br>Vlado Ščiavinsko nuotr.
Daugiau nuotraukų (1)

Lrytas.lt

May 23, 2022, 12:59 PM

Kazys Starkevičius, chairman of the Seimas Committee on Economic Affairs, Vilija Blinkevičiūtė, leader of the Social Democrats, and Rytis Krušinskas, professor at Kaunas University of Technology (KTU), discussed this in the programme „Not for the Press“ on „Lietuvos rytas“ TV.

During the programme, V.Blinkevičiūtė accused the ruling party of slowly adopting anti-inflationary packages, unlike other EU countries.

„For some reason, other countries have already adopted more than one anti-inflationary package because they see that prices have been rising all year and understand that people will not be able to survive if the government's decisions are not taken. At that time, Lithuania was calm. But, on the side of those in power, it was said: that oil and gas prices are rising everywhere, and there is nothing we can do.

The solutions were insufficient, just like the anti-inflationary package voted on in the Seimas this week. As one of my colleagues said, it's a bit of a snooze,“ the Social Democrat said of the package.

She mentioned that so far, she has heard noises from the Prime Minister, the Finance Minister or other government members that salaries and benefits will be increased to a level that outpaces inflation.

„But it turns out that the king is naked: as many as 10% of Lithuanian workers earn the minimum wage (MMA). It turns out that the salaries of those who earn EUR 2,500 and more have grown more than inflation because companies, in order to retain high-level specialists, have increased their salaries,“ Blinkevičiūtė calculated. -

The increase in the non-taxable income rate (NIT), which will mean that those earning the least will receive an additional EUR 16 per month, is just a fig leaf. The Social Democrats proposed to apply the NPD to the entire MMA. The Governor of the Bank of Lithuania proposes the same. This would raise incomes by €60–70.“

At the same time, Starkevičius listed the beneficiaries of the increase: teachers received an average increase of €100 after-tax, social, cultural and other public sector workers received an increase of €80, and pensions were increased by 5%.

„Wages rose by 12% last year, but labour productivity did not“, the politician pointed out.

Professor Krušinskas pointed out that Lithuania is not the only country in the world and in the EU that is experiencing higher-than-expected price increases. The big challenge is the unpredictability of the economy. It was expected that in March and April, the coronavirus would say goodbye and energy prices would start to decline. But the events of 24 February changed the view of economic growth, corrected oil prices and started a new merry-go-round.

„Both war and a strike are economic shocks. The lesson of March is that we saw employment change. Unemployment peaked around 2020, with unemployment numbers approaching double digits. Now we see that unemployment is one of the lowest – around 6.7%. This is a positive sign, but there are other signals – unemployment in Lithuania used to fall during the summer,“ commented R. Krušinskas.

He also looked at other indicators. They show a growing negative balance between imports and exports – export capacity is declining, which means that the contribution of industry is shrinking. The professor looks with concern at the redundancies at Lithuanian Post, Lithuanian Railways and the load on the port of Klaipėda. He predicts that we will probably see the economic effect in the autumn. Whether this will contribute to unemployment and lower turnover in related sectors remains to be seen.

„We can attack the fire now, or we can prepare for a little later when the impact may be even greater. I think that preparations for a bigger blow are underway now. We can feel that there is a slight delay in the indicators that the Statistics Department is giving. It is encouraging that the budget revenue collection is higher than planned in the first quarter alone,“ said R.Krušinskas.

V.Blinkevičiūtė compared the recent and the 2008–2009 global crises. „At that time, the path of endless austerity was followed, when people's salaries were not raised, and even pensions were reduced. This did not produce good results. Lessons have been learnt – during the pandemic, both the EU and Lithuania tried to react quickly, and we followed the path of investment rather than austerity,“ the politician said.

However, she criticised the ruling party for doing virtually nothing until 24 February, „when it was clear that energy prices would rise and affect people's lives“. Ms Blinkevičiūtė pointed to other EU countries that had adopted anti-inflationary packages and said that the Lithuanian government had taken perhaps the only decision last December: to spread heating prices over a year.

She did not make too much of the indexation of benefits. This was the case in all countries and is usually done annually, based on inflation over a given period. „This is nothing new. At the end of the heating season, a decision was taken to zero value-added tax on central heating. That's all,“ said the Social Democrat.

At the time, Starkevičius explained that the budget was formulated in the hope that the situation would change in March. „But it must be objectively assessed that war brings its own consequences. All kinds of raw materials and foodstuffs are becoming more expensive,“ the chairman of the committee said on „Not for the Press“.

He pointed out that €973 million is earmarked for strengthening energy independence, mitigating the effects of inflation, and that the energy breakthrough package will start on 1 July. According to K. Starkevičius, the money that is currently sitting in banks will be used to build small power plants on their roofs and to create parks.

There is also the rail package because infrastructure needs to be maintained. „I understand that the flow of freight will reduce the number of workers, but the construction of Rail Baltica is being thought about – builders will get jobs, and tenders are already being held. The port looks quite good, and the LNG terminal is working at maximum speed, which also contributes to the state budget,“ Starkevičius said.

The situation with Lietuvos Pasts (the announced restructuring, which will see 600 redundancies – editor's note) is a lack of long-term reforms. Lithuania Post should have been reformed earlier. Now we are experiencing it at the worst possible time“.

Professor R.Krušinskas, on the other hand, says that there are no prescriptions ready for this situation, as we are all learning to live in a new reality. „The current situation affects low-income people the most. Perhaps we should rethink the direct support measures for them. Then, of course, the question will arise as to how those on higher incomes are worse off, but we have to realise that war comes at a cost. The economic shock that war and its actions bring is the fuel that we have added to the fire“, commented the KTU professor.

According to him, the first quarter's higher budget figures are as if to say – let's increase benefits and everything will be fine. However, it is not known what the second quarter will be like, which will include more time with the impact of the war, and the third quarter is also uncertain. We are seeing a recovery in the accommodation and catering sector. However, we do not know whether this will be a momentary recovery. Mr Krušinskas pointed out that last year, at this time, these sectors were starting to recover from COVID-19, so this year's figures will be somewhat deceptive.

There is another important aspect that he highlighted: it will be very difficult to withdraw the welfare package once the situation starts to improve because people get very used to it.

The Chairman of the Parliament's Committee on Economic Affairs thinks that we will see a fall in inflation in the autumn, followed by a possible deflation.

Krušinskas calculates that there will be no major changes in the mood of the markets before mid-summer unless there are unforeseen geopolitical actions that could change the mood of the markets. „Looking at oil prices and the crude oil deals that are being made now, there is no downturn in sight – the oil price is stable at a high level for both June and July,“ the professor said.

If the war were to end, a correction in oil prices could be expected. Already we are seeing the US stepping in to supply gas. Iran is considering supplying natural resources to Europe – alternative sources are emerging that could affect energy prices. So the tension that Europe could be left without electricity, without oil, and without heating may be eased. This changes the general mood, takes the pressure off, reduces the shock and allows life to go on.

Finally, with troubles come opportunities to find new markets. „The only question is to what extent business will share the benefits with the state and with workers“, the professor noted.

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