Recession is on the horizon, and in the second half of the year Lithuanian residents may see a long-seen phenomenon

Disrupted logistics, increased cargo transportation prices, and soon Russian aggression against Ukraine, which led to an increase in the price of raw materials and energy resources. The result is double-digit inflation.

But the country’s business held up even in these conditions. Lithuania’s GDP grew by 2.2 percent during the year.

Warning signal

However, most economists predict that Lithuania may experience a technical recession in the first half of this year. After all, the last quarter of 2022 was not impressive – compared to the third quarter, GDP fell by 0.5 percent.

This was due both to the uncertainty about energy prices, although they have already clearly started to decrease, and to the start of rising base interest rates.

As noted by economist Tadas Povilauskas, according to the fourth quarter fixed recession, Lithuania was among the worst performing European countries.

“However, even worse than Lithuania’s GDP changes in the last quarter were shown by those countries with which we often compare, Poland, Estonia and Sweden. Poland’s quarterly GDP change was the worst among EU countries (a drop of 2.4 percent compared to the previous quarter. – Ed.).

In Estonia, GDP has been declining for three consecutive quarters and the technical recession there is moving towards a real recession. By the way, the Baltic and Nordic countries are the ones with a much larger share of variable interest rates and which will be increasingly affected by rising interest rates in the coming months. Therefore, it is very real that at least in the first half of the year, this region will be relatively hurt.

However, Southern Europe is waiting in line – the rising interest rates there will require more and more money to pay the already much higher interest rates to the authorities of those countries when refinancing loans”, explained T. Povilauskas.

Recession is on the nose

According to economist Alexander Izgorodin, our country will probably not be able to avoid technical recession, when the GDP declines for two quarters in a row.

Data from January showed that the engine of the economy, the export industry, whose expectations were worse than even during the COVID-19 pandemic, felt uncertain. In addition, more and more production is loaded into warehouses instead of being sold.

“So far, the data shows that we may see a recession again in the first quarter of this year. The only good news is recovering consumer expectations. People are more optimistic about the prospects of the labor market and their financial condition.

Therefore, growing domestic consumption can moderate the fall in industry. But Lithuania’s economy is still much more dependent on exports,” said A. Izgorodins.

According to financial analyst Marius Dubnikovas, the energy crisis, when electricity and gas prices jumped several times, affected the manufacturing sector the most. The most striking example is the semi-functional Achemas fertilizer factory.

“Poultry farms and the entertainment and catering business were also severely affected. It’s a wonder that swimming pools and wellness complexes were open at such prices. But now these sectors are already recovering”, explained M. Dubnikovas.

True, it is much more complicated in some other sectors. For example, in January, compared to the same month last year, furniture production fell by as much as 22 percent, wood products industry – by 17 percent.

“Companies in this area are highly dependent on export markets, and they are unlikely to recover soon.

Interest rates are rising, consumers in foreign countries are extremely cautious, so they are less likely to make large purchases, including furniture.

In our country, such a trend is much less noticeable due to the fact that, despite the huge inflation, the income of the population continues to increase. In many foreign countries, they grew much more slowly, and in some places it was completely symbolic,” explained M. Dubnikovas.

Profits will be lower?

Many consumers have already felt the rising base interest rates, when the monthly mortgage payment jumped by a hundred or even several hundred euros after the interbank interest rate EURIBOR rose from 0.5 to 3.5 percent.

However, even this is unlikely to be the limit, as the European Central Bank continues to raise interest rates.

And this means that not only residents with loans, but also businesses have to pay more.

“Of course, the cost of capital for business grows along with base interest rates. However, when consumers change their habits, when raw materials and energy resources are finally cheap, it will be very difficult to shift more expensive loans onto the shoulders of buyers, after all, competition also works.

Therefore, the capital appreciation will most likely affect the shareholders’ pockets – the profit will simply decrease”, predicted financial analyst M. Dubnikovas.

The bottom of the milk crisis

The most important thing for almost all consumers is when the prices of basic food products will stop rising. Because they danced impressively last year – in December, food products were even a third more expensive than a year ago.

It is true that the same thing happened in neighboring countries – in Estonia they rose in price by almost 31 percent, in Latvia – by 27 percent.

One sector where prices rose particularly significantly was dairy products. There is a possibility that they will become cheaper because the purchase price of milk has started to decrease.

“The situation in the milk market changes very quickly, not even every few months, but every week. At the beginning of March, I would have said that dairy markets had bottomed out and things would only get better from now on, but soon those uptrends started to fade.

I myself think that the markets have nowhere to fall, but for now there is no peace in them, which affects the entire sector – the ability of milk processing companies to sell their products also affects the price of raw milk”, explained Dalius Trumpa, the director of the Rokiškios sūris company.

Even after the start of the war in Ukraine, last year was very good for dairy farming, but the biggest decline started when consumption stopped.

“Consumers have the money that could be earned by companies and paid to farmers. They currently spend less on food, including dairy products.

After all, due to inflation, you have to pay more for services, energy is more expensive, and the interest rates when paying installments for loans have risen especially sharply,” said D.Trumpa.

There was no food crisis

The year 2022, despite the challenges of nature, war and other geopolitical events, was good for agriculture in the world and in Lithuania – the predicted food crisis was avoided.

Raimundas Juknevičius, representing the farmers, reminded that the grain exchange was shocked when Russia attacked Ukraine, prices jumped because Ukraine had not sold a lot of grain from last year’s harvest.

“It was completely unclear what impact the sanctions against Russia would have on the market. Later, the prices fell when the ships with grain left the ports of Ukraine”, reminded R. Juknevičius.

Currently, the price of a ton of wheat for May transactions on the Matif exchange is 263 euros, last fall it hovered around 330-350 euros.

To compare the 2022 harvest with the 2021 harvest, 0.5 million tonnes of grain, legumes and rapeseed were grown in Lithuania. tons more – a total of about 7.3 million tons. According to the volume of wheat exports, Lithuania is in the fifteenth grain exporting countries in the world.

However, this sector has one problem – a large part of the harvest is simply exported, instead of being processed locally and creating additional added value. True, Karolis Šimas, president of the Association of Grain Processors and Traders, said that value is created not only by processing grain, but also by selling and exporting it.

“In Lithuania, no other branch of agriculture creates as much added value as grain production, but it is distributed in various sectors.

Therefore, it is necessary to evaluate the entire product chain that creates added value in Lithuania, because one part goes to farmers, the other to trading companies, the other to local processors, brokers, logistics companies that transport grain by wagons or trucks, the seaport and loading companies there,” explained K. .This one.

Last year until October, when grain purchase prices were high, professional farmers who sold grain received 2-3 thousand from 1 hectare, depending on the cultivated crop. euro income.

“A few years ago, when grain was still cheap, the Lithuanian Association of Grain Processors and Traders conducted an analysis and compared the shares of the total added value created by livestock and grain production for the Lithuanian economy. The latter received 25 percent, grain growing – 75 percent,” explained K. Šimas.

According to him, the added value attributable to each person working in grain processing or grain trading companies in Lithuania in 2021 was about 65 thousand. euros, and in 2022, according to a preliminary assessment, it should have exceeded even 100 thousand euros.

It can be compared with the added value per person created by all Lithuanian industrial companies – it amounts to about 30-40 thousand. euros.

“In 2021, the added value created by the companies belonging to our association per employee was 65 thousand. euros, and after all, it was not the most fruitful year, nor was grain expensive. Thus, the value created by the grain trade, processing and export sector is particularly high”, assured the head of the association.

It would not be easy to quickly increase Lithuania’s added value in the processing chain, but it is possible, so it is necessary to move in this direction as well.

“It’s just that the flour industry in Lithuania cannot quickly create even greater added value, because there are only two mills left – the Malsena Plius and Kauno grūdai companies.” Due to the minimal profit margin and high competition in international markets, other participants in this market did not survive.

And the market for the preparation of grain or fodder has stabilized, although these companies are still finding certain niche products for export.

The biofuel or oil market could quickly increase the share of recycled production, but this requires political will and support to increase the share of this production in fuel and reducing the alternative of imported olive oil,” the interviewer explained.

Other types of grain processing industries, such as cereal or quick snacking, are niche, but they are expanding rapidly and the growth of this industry is already visible.

“Lithuania processes and consumes slightly more than 2 million tons of grain (together with seed preparation and for farmer’s feed) – about two-thirds of the harvest and more are exported.

So-called deep processing, like Roquette Amilina’s production of gluten, starch and other products from wheat, adds significant value, but such projects are complex. A lot of time is wasted before they enter the market. In addition, it requires large capital, specific knowledge, and the development of so-called greenfield projects involves a lot of bureaucratic regulation.

But if large global companies come to us to invest in one or two more factories, the current processing would be increased to 50%”, explained K. Šimas.

According to him, the situation is similar in other countries with old traditions of grain and rapeseed cultivation: the USA and Canada export grain in a similar ratio, Australia – even more, because in fertile years they keep up to 15 percent for themselves. harvest

“However, the crop sector is the future of agriculture.

This is important both because of the prospects for the so-called food of the future, and because of the future food shortage, and because it provides economic benefits to our state, processors, traders and farmers,” said K.Šimas.

We are also talking about deflation

Greater added value is very important from a macroeconomic point of view. However, ordinary buyers only see the fact that the prices of bread and its products rose by about 40 percent during the year.

However, economists have been reassuring for some time that inflation should stop soon. “She is getting serious, although not as fast as she would like. Gas, electricity, even diesel is expensive, although it was believed that it should become more expensive in the EU when imports from Russia are stopped.

This makes it possible to increase competition, and its effect is most felt not in the service sector, but in the trade sector. You can’t find a store that doesn’t have all kinds of promotions.

On the other hand, inflation puts pressure on consumer expectations, they buy less and try to save. And this is also an impetus to lower prices”, explained financial analyst M. Dubnikovas.

In his opinion, already in the second half of the year we can see a long-seen phenomenon – deflation, when prices will be lower compared to the same period of the previous year. This can be determined by another factor – an extremely large comparative base.

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