Opinion on the endorsement of the economic development scenario

The National Audit Office of Lithuania, implementing the functions of the budget policy monitoring institution (Fiscal Institution), endorses the Economic Development Scenario for 2020–2023 prepared by the Ministry of Finance. The risk of the change of internal and external conditions, which might have a significant effect on the deterioration of the economic situation, remains and the scenario may not materialise.

In Q1–Q3 of 2020, the contraction of Lithuania’s economy was lower than expected and reached 0.8%. Domestic consumption and investment deteriorated during this period, however, the decline in real gross domestic product was mitigated by the recovery of the exports of goods in Q3. However, the restrictions introduced during the second quarantine are likely to lead to lower private consumption in Q4. Lithuania’s real GDP is projected to contract by 1.5% in 2020, however, a growth of 2.8% is projected in 2021.

“The approval of COVID-19 vaccine provides moderate optimism regarding the containment of the pandemic, however, this in itself does not guarantee a quick recovery of Lithuania’s economy in 2021. The recovery will depend on the success of overcoming the vaccination process related challenges: its production, transportation, distribution and vaccination activity of the population. It should be noted that other internal and external risk factors as well as business and residents’ ability to adapt to rapidly changing environment are also important“, says Jaroslav Mečkovski, Chief Specialist of the Budget Policy Monitoring Department.

The measures taken by the Government during the first wave of COVID-19 could have helped companies to withstand financial losses, however, with the beginning of the second wave of the pandemic, support of the Government becomes even more important. Nevertheless, the decisions taken contributed to growing general government deficit and debt level. For this reason, the properly targeted measures of economic stimulus remain important in order to avoid excessive commitments to be made during this period.

Internal risk factors remain related to domestic demand, consumer expectations and the labour market. The restrictions imposed due to the spread of COVID-19 reduce domestic consumption and increase uncertainty in labour income. Taking this into account, consumer expectations may deteriorate and the level of savings may grow. The medium-term challenge of reducing unemployment, which is largely dependent on economic recovery, remains.

The growing scale of the COVID-19 pandemic has a negative impact on global economies and the risk factors related to geopolitical context remain. The renewed quarantine restrictions have a negative impact on international trade, tourism and the service sector and, as a consequence, prompts a review of existing economic recovery forecasts. The growing probability of hard Brexit contributes to uncertainty in the geopolitical situation as the transition period approaches.

The Fiscal Institution updated the heatmap of Lithuania‘s economy. The 2020 forecast shows that rising temperature of the economy up to the beginning of the COVID-19 spread has fallen and is likely to remain below 2017–2019 level.