Economist predicts what life will be like next year: predicting when economies will fall into recession

Nerijus Mačiulis, Chief Economist at Swedbank, says that Lithuania's annual economic forecasts remain unchanged, with gross domestic product (GDP) expected to contract by 0.3%. At the same time, according to Mačiulis, Lithuania's GDP will grow by 1.2% in 2024, and annual inflation, currently at around 2.8%, will fall below 2% next year.

Nerijus Mačiulis.<br>Photo by V.Skaraitis.
Nerijus Mačiulis.<br>Photo by V.Skaraitis.
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Žygimantas Šilobritas

Nov 15, 2023, 3:24 PM

„The Lithuanian economy is expected to contract by a few tenths of a percentage point this year, and we are not changing our forecast,“ said N. Mačiulis.

The Economist assured that although the Bank of Lithuania forecasts inflation of 3% in 2024, Swedbank estimates it will not reach 2%.

„Our forecasts differ from those of the Bank of Lithuania,“ he stressed.

N. Mačiulis noted that there is a significant difference between the appreciation of goods and services when looking at the impact of inflation. According to him, between October 2022 and October 2023, the price of goods rose by 1.9% and services by 7.7%.

Also, according to him, when analysing the 2-year change, all food products in Lithuania have increased in price by 41%, and the current price of food is higher than the European Union average.

Swedbank's Economist forecasts that employment will fall slightly next year and the unemployment rate will reach 7.1%. He says that average wage growth will slow to 8.5% in 2020 and 6.2% in 2025.

According to Mačiulis, the country's exports of goods and services are expected to fall by 2.8% in 2023 (previously forecast at 2.5%) and to grow by 2.5% in 2024 (previously forecast at 2.8%).

The Economist also said that the European Central Bank (ECB) will cut interest rates for the first time in April and that they will reach 2.5% at the end of 2024. The reasons for this, he said, will be the sharp drop in inflation in the euro area, which has reached deflationary levels in some countries, and the stagnation or even contraction of economies.

The economist said that in 2024, the US and the euro area would be in recession. He said that, although this recession would not necessarily be long-lasting, the factors that had sustained growth in the US and some stability in some euro area countries were no longer present. He forecasts that the US economy will grow by 2.4% this year, while eurozone GDP will increase by just 0.4% and 0.8% and 0.2% respectively in 2024.

Doubtful whether budget revision will be needed

According to Swedbank, Lithuania's budget deficit will be around 2.6% in 2024 and reach 2.2% in 2025 as pressure eases after the elections and the economy performs better. According to N. Mačiulis, the current government is pursuing a conservative fiscal policy, so a review would not be needed even if lower budget collections are projected.

„We are forecasting a lower budget deficit than the Ministry of Finance and the Bank of Lithuania. We see that public finances are projected in a very conservative way, and the state cannot spend the finances it projects. This means there is a very low probability that the budget will have to be adjusted,“ explained Mačiulis.

„It is difficult to imagine circumstances under which the budget would have to be revised“, he stressed.

The economist pointed out that the only case in which it would be possible to exceed the 3% deficit would be a general recession in the euro area, but under such conditions, many countries would exceed the Maastricht criteria.

„Many EU countries would likely exceed the 3% deficit threshold and that nothing would happen“, he said.

Lithuania sees record number of people in employment

According to Mačiulis, there are currently 1.472 million people working in Lithuania, only 6,000 fewer than in 2007, although around 350,000 Lithuanians have emigrated since then. Moreover, he said, employment is currently growing in almost all sectors.

„This level of employment is a unique achievement, given the decline in the population during this period,“ Mačiulis said.

The economist stressed that this growth was due to the rising employment rate of older people, which currently stands at around 21%. However, he noted that this increase in employment among older people is at least partly due to insufficient income for subsistence, but there is also a change in attitude.

„In Iceland, 30% of older people are partially occupied. In Japan, where life expectancy is known to be much higher, it is 50%. We believe that as time goes on and life expectancy increases, more and more Lithuanians will decide not to finish their careers at retirement age,“ he said.

The inflow of immigrants has also contributed to the increase in the working-age population, with around 31,000 in the last 12 months. Mačiulis said that the number will decrease in the future but will still reach up to 15,000 people a year.

US spurt to fade, eurozone still frozen

According to Swedbank economists, disrupted supply chains, staff shortages, financial reserves built up during the pandemic, and generous government handouts have created an overheating of economies in many Western countries in recent years, with demand outstripping supply, contributing to a surge in inflation. However, the population's loss of purchasing power and high-interest rates quickly cooled demand.

„US growth this year was still fuelled by the financial reserves built up during the pandemic, rising employment and substantial budget deficits. Meanwhile, the euro area economy contracted slightly in the third quarter of the year, and its GDP is almost unchanged from the middle of last year. Economists see the eurozone's growth as being depressed by the population's loss of purchasing power due to the previous year's inflation, the uncompetitiveness of some industrial sectors due to more expensive energy, and unusually high interest rates.

Global trade has declined since this summer and has fallen below its long-term growth trend. Demand for commodities remains weak in many European countries. This is reflected in weaker industrial performance and expectations,“ the Economic Survey said.

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