News2023.05.02 15:59

Lithuania’s economy is in a technical recession – what does it mean?

Lithuania’s gross domestic product (GDP) has declined for a second consecutive quarter, meaning the country is now going through a technical recession. What does it mean, and can it be equated with an economic crisis?

According to the State Data Agency (VDA), Lithuania's GDP contracted by 3.7% year-on-year in the first quarter of 2023, and by 3% compared to the last quarter of 2022.

This is the second consecutive quarter of negative GDP growth in Lithuania. Economists say that if GDP declines for two consecutive quarters, this can be considered a technical recession.

GDP is an indicator of how much goods and services have been produced in a country over a given period of time (usually a quarter or a year), giving an estimate of the size of a country's economy.

According to the VDA, the performance of manufacturing, wholesale and retail trade, transport and storage, and real estate operations had the largest negative impact on GDP this year.

And although people usually associate recession with crisis, they are not synonymous.

The term recession is understood as a significant and widespread slowdown in economic activity over an extended period of time.

Typically, recessions result in lower sales and profits for companies, higher unemployment, more cautious consumers and less consumption.

According to the Bank of Lithuania, a recession is a normal part of the business cycle, moving from peak to recession, followed by a recovery and a new business cycle.

As there is no precise definition of a recession, it is difficult to identify when economies go into full-fledged recession, the bank said.

“In the United States, it is customary to wait for the announcement of a recession from the National Bureau of Economic Research [...], which analyses and compiles a chronology of all recessions that have occurred in the US,” said Darius Imbrasas, an economist at the Bank of Lithuania.

“However, even this institute took more than a year to be able to tell exactly when a recession started in the US economy during the global financial crisis,” he said.

“Partly for this reason, the term ‘technical recession’ is increasingly used, referring to two consecutive quarters of decline in economic activity (GDP). However, in this case, technical recessions will not always coincide with real recessions,” Imbrasas added.

An economic crisis is seen as an extreme disruption of the normal business cycle.

“Normally, they are not caused by economic cycles, but by various unforeseen events, such as natural disasters, wars, failures of economic policies, or unjustified panic in global financial, banking and capital markets,” Umbrasas said.

“Economic crises last much longer and have significantly greater negative effects on the economy than recessions,” he added.

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