2021-09-21
National Audit Office: at least a neutral fiscal policy must be maintained to avoid overheating the economy
The National Audit Office of Lithuania, implementing the functions of the fiscal institution, assessed and endorses the Economic Development Scenario for 2021–2024, published by the Ministry of Finance on 10 September as it is suitable for the preparation of the draft budgets attributable to the general government. The risk remains that the Scenario may not materialise due to changes in internal and external conditions leading to a significant change in the economic situation. The main threat to the economic development, both in Lithuania and globally, is the further development of the pandemic.
The development of the Lithuanian economy was strong in the first half of 2021. Compared with the same period a year ago, the country’s real GDP increased by 4.7%. Investment and household consumption expenditure have been the main drivers of economic growth. The improvement in economic indicators is also due to a base effect: contrary to the situation a year ago, the country’s economy was no longer constrained by the tight quarantine restrictions.
“In 2020, the Government stimulated the economy by increasing debt, while in the private sector the loan portfolio of non-financial corporations contracted, savings grew, households’ consumption declined, and their loan portfolio grew at a slower pace than in 2019. The opposite trend is observed this year: the domestic demand is driven by the private sector and credit growth, while the fiscal policy is neutral. In order to not overheat the economy at least a neutral fiscal policy shout be maintained”, says Saulė Skripkauskienė, Head of the Budget Monitoring Department.
In the Economic Development Scenario the growth rate of Lithuania’s real GDP is projected to reach 4.3% in 2021 due to strong domestic demand, while the growth rate will slow to 4.0% in 2022. Household consumption and accelerating investment are expected to be the main drivers of economic growth. Faster growth of imports than exports will lead to a negative impact of net exports on economic development in 2021—2024.
It is noted that the internal risk factors remain related to inflation and labour market challenges. During first 8 months of 2021, the inflation reached 2.6%, however, from 2020 onwards inflation dynamics has been strongly influenced by energy prices. Due to this, acceleration in inflation is likely to be temporary. However, risks remain that prolonged supply chain disruptions and rising inflation expectations could lead to faster than projected price increase. Labour market challenges remain: the number of job vacancies has reached record levels, nevertheless, the unemployment rate and the number of employed persons have not returned to their pre-pandemic levels.
The National Audit Office, implementing the functions of the fiscal institution, has updated the heatmap of Lithuania’s economy. The forecast for the third quarter of 2021 shows that the temperature of the Lithuanian economy is likely to be above the average level of 2017–2019.