OECD Economic Outlook, Volume 2020 Issue 1

Lithuania

The economy is projected to contract sharply as the COVID‑19 pandemic drags down both domestic and external demand. GDP growth is expected to shrink by 10.4% in 2020 in a scenario that assumes that a second virus outbreak occurs later in the year and by 8.1% in a single-hit scenario. GDP growth will rebound as confidence and world trade pick up, boosting consumption and investment. Unemployment will rise, but despite some gradual decline, it will remain above the pre-crisis level.

The policy response to the COVID-19 pandemic has been swift and comprehensive, comprising both fiscal and financial measures. Further strengthening of targeted social benefits and effective active labour market programmes, such as training, would support the recovery and prevent increases in poverty. Additional support for firms facing liquidity problems may also be required if the crisis is deeper than expected. Efficient insolvency procedures that facilitate enterprise restructuring are important. Ensuring that the health system has sufficient resources to deal with a potential second outbreak of the pandemic is another key priority.

A range of containment measures were launched at an early stage

The COVID-19 pandemic reached Lithuania in February 2020. Active cases peaked in April and the fatality rate remains low. Vilnius and Klaipeda were the most affected regions. The health system has so far had sufficient capacity in terms of curative and acute hospital beds to meet the increased needs, and hospital and outpatient services are widely accessible.

Lithuania: Two scenarios of real GDP and confidence

1. Balance refers to the (seasonally adjusted) percentage point difference between positive and negative responses from respondents to the European Commission economic sentiment survey.

Source: OECD Economic Outlook 107 database; and OECD Main Economic Indicators.

Statlink

Lithuania: Demand, output and prices (double-hit scenario)

Statlink

The containment measures included a nationwide quarantine that commenced in mid‑March, travel bans and border closures, the shutdown of non‑essential shops, the prohibition of public events, and the closure of education institutions. Measures to cope with the health emergency were also introduced, including the operational re‑organisation of patient flows, material and human resources, and increased testing. Moreover, a fiscal package in response to the crisis allocated EUR 0.5 billion (1% of GDP) to the healthcare sector for the acquisition of equipment as well the financing of additional costs, including bonuses to healthcare workers, and the provision of subsidiary social guarantees for employees infected by a contagious disease. A gradual easing of the confinement measures began in mid‑April.

Economic growth has been hit by the pandemic

The outbreak of the pandemic triggered a sharp decline in activity as the confinement measures and restrictions on travel and mobility disrupted economic activity, lowered household spending and heightened uncertainty. Collapsing demand in trading partners reinforced the slowdown. Retail sales, and consumer and industry confidence plunged, and despite a subsequent uptick remain very low, and the number of registered unemployed increased rapidly following the confinement. The direct initial impact of the lockdowns could have reduced the level of aggregate output by one‑quarter, mostly concentrated in the retail and wholesale sectors, and professional and real estate services.

Lithuania: Demand, output and prices (single-hit scenario)

Statlink

A broad stimulus package was introduced rapidly

An overall package of EUR 5 billion (10% of GDP) was announced on 16 March, equally split between fiscal and financial support. The fiscal initiatives under the package, and additional measures introduced since then, provide funds for the health care system and emergency management, as well as measures to preserve jobs and incomes, maintain business liquidity and stimulate the economy. Measures include short‑time work schemes in the form of wage subsidies that ensure that workers receive at least the minimum wage, a flat benefit (EUR 257 per month) for the insured self‑employed, and increased sickness benefits for employees infected by the virus. There are also loan and tax payment deferrals, soft loans to eligible SMEs and temporary rental subsidies to businesses. To help the economy recover, special attention is given to the acceleration of investment programmes, including through the co‑financing of climate investment projects. Additional fiscal measures were approved by the government in May 2020, amounting to approximately 2% of GDP, to support businesses and households after the end of confinement, including an extension of short‑time work schemes for six months, a temporary job search benefit and increases in social benefits. Moreover, the central bank lowered its counter‑cyclical capital buffer from 1% to 0% in March 2020 and is taking a more flexible approach regarding some capital and liquidity requirements imposed on banks. Solvent financial institutions who are facing temporary liquidity problems can currently apply to the Bank of Lithuania for emergency liquidity assistance. These initiatives are in addition to the ECB’s accommodative monetary policies.

A second outbreak would delay the recovery further

GDP growth is projected to contract in 2020 by 10.4% if a second outbreak of the virus occurs towards the end year (the “double‑hit” scenario), as consumption falls sharply with containment measures and the associated rise in unemployment and supply disruptions shrink production. Should there be no second outbreak (the “single‑hit” scenario), output will decline by 8.1%. The pandemic is also taking a toll on investments through plunging business confidence and a decline of demand for exports. The severe slowdown will be followed by a recovery once confinement restrictions are lifted and external demand strengthens, helped by policy measures. EU structural fund disbursements will continue to provide support to investment. Unemployment will rise and, despite a subsequent gradual decline, remain above its pre‑crisis level, especially in the double‑hit scenario. Shifts in domestic spending patterns and weaker‑than‑expected growth in trading partners could slow the recovery, while a sharp correction in financial markets would have an adverse impact on corporate funding conditions.

Further policy measures are necessary to ensure a solid recovery

The stimulus package was timely and comprehensive, and should help to mitigate the economic impact of the COVID‑19 pandemic. Measures such as short‑time work schemes and support for non‑standard workers can protect jobs and incomes. It is important to ensure that the support measures are well‑targeted on the firms and employees most affected by the crisis. The low public debt level provides fiscal space for additional support if the downturn is more severe than expected. Preventing increases in already high poverty rates, including by increasing social benefits for those with the lowest incomes, is essential. In addition, structural policies will play a key role for the aftermath of the crisis. Effective job‑search assistance along with training and retraining programmes are vital. Efficient insolvency procedures that facilitate enterprise restructuring are also very important to restart the economy. Ensuring the preparedness of the health system to cope with a potential second outbreak of the pandemic through sufficient resources is another key priority. Implementation of climate investment projects is necessary for a greener recovery.