This year was supposed to be a renaissance for physical trade and services. After several years of pandemic restrictions, consumers were ready to open their wallets wide enough. However, the war in Ukraine and high inflation have significantly dampened spending power. It looks like the good times for the retail and service sectors are being put on hold for at least a year again.
Retail trade sector in 2022 started in a very good mood. According to Swedbank’s payment data, the country’s residents spent a record amount of money on various goods and services at the end of last year. In addition, the amount spent on electronics and luxury goods jumped significantly, which indicated the strong financial position of consumers.
The surge in retail sales did not end after the holidays – it showed growth of around 20% in the first months of this year as well. However, the situation changed after Russia’s military invasion of Ukraine in late February, when retail sales growth began to slow. The turning point occurred in June, when the real growth of retail trade, according to the data of the Lithuanian Statistics Department, became negative.
This means that the country’s consumers are currently buying fewer goods and services, even though they are spending more money on them. The main reason for the changed trend is inflation reaching more than 20%, which can no longer be compensated even by the rapid growth of wages that prevailed until now. What does this mean for the country’s retail sector?
Broken consumer expectations
The situation is reminiscent of 2021. at the beginning, when it was hoped that a large-scale vaccination campaign would help quickly contain the virus. At the time, the light at the end of the tunnel was obscured by the delta strain that began spreading over the summer, forcing some pandemic restrictions to remain in place and preventing physical trade and the service sector from fully recovering.
It is true that it has become a golden age for online commerce. in 2020 Internet merchants’ income in Lithuania increased by about 80%, and in 2021 the growth was about 50% compared to the previous year. The acquired growth acceleration was enough even for this year – during 2022. January-May Internet trade in Lithuania still grew at a 22% annual rate. For those traders who were able to take advantage of this opportunity and move some of their activities into the virtual space, online trading has helped to at least partially compensate for the losses of physical trading.
This time, however, online commerce is unlikely to be able to offer salvation, as the retail and service sectors are not affected by physical restrictions, but by the sharp increase in consumer daily spending and their deteriorating mood. Looking at the next six months from the consumer’s point of view, there are not many positive signs – the prices of energy resources remain high, the upcoming heating season can again significantly empty the wallet, and the prices of food and other necessary expenses tend to rise for the time being.
Several positive factors
Despite the listed unfavorable factors, there is a brighter outlook. Inflation, which approached the level of 21% in July, is showing the first signs of exhalation – the monthly growth of inflation has started to slow down. If this trend continues in the next few months, it will be possible to state that the price pressure on consumers is gradually easing.
Secondly, the financial situation of the country’s population remains generally quite good. The amount of funds kept in bank accounts, which has grown significantly over the past two years and now amounts to about 20 billion. Eur, so far not decreasing. This shows that residents have not started to “burn” their savings for necessary expenses, and they manage to compensate for the more expensive goods and services from their current income.
A third favorable factor is the relatively low unemployment rate, continued wage growth and state-guaranteed benefits for the vulnerable. For example, the analysis of the International Monetary Fund shows that since the beginning of this year, the basket of necessary expenses in Lithuania has risen by about 7-8% and, taken as a whole, corresponded to the average of the EU countries. But more interestingly, this increase was very similar between the lowest income fifth and the highest income fifth of the population, while in many other countries the increase was felt more by the poorest. This contributes to better financial resilience of all Lithuanian consumers.
What to expect in the near future?
In the coming six months, Lithuanian consumers will be cautious, they will evaluate their expenses more rationally and refrain from unnecessary purchases, they will probably try to devote part of their money to the winter season. Therefore, the wave of spending observed at the end of last year and the beginning of this year will not be repeated in the next six months, and representatives of retail trade and services may have to live another year waiting for a brighter tomorrow.
If inflation subsides and energy and food prices stabilize, consumer sentiment may pick up as the holiday season approaches, and we’ll see another surge in both online and brick-and-mortar sales.
At that point, going into next year, a lot will depend on the labor market situation and salary trends. If the unemployment rate does not increase significantly, the minimum monthly salary will be increased next year, the amount of tax-free income will be increased, which would significantly increase the income of a significant part of the population, and this will become a positive impulse for consumption. If this scenario holds true, we should be ahead of the EU average in terms of our consumption expenditure, taking purchasing power into account. in 2021 at the end of 2015, consumption expenditure in Lithuania accounted for 96% of the EU average consumption expenditure.
Looking at long-term trends, retailers should pay more attention to the topic of sustainability. Already today, we can see that the growing awareness of consumers is encouraging them to limit their consumption appetite, to rethink their choices and decisions in terms of their impact on climate change.
Attention to sustainability will only increase in the future – and not only from the consumer side. Here, the EU institutions are actively considering the Carbon Border Tax Mechanism (CBAM). It envisages the application of a tax on some goods produced and imported from third countries with lower environmental standards than the EU. This would undoubtedly lead to an increase in the price of part of the production. Therefore, the retail trade sector must already pay attention to the sustainability of the production and trade sector, look for solutions that will reduce the negative footprint on nature.
The financial sector is ready to help its clients focus on the strategic direction of sustainability by offering financing solutions and reliable partnerships.
The author of the comment is Antanas Sagatauskas, head of Swedbank’s Business Customer Service
The opinion of the author does not necessarily coincide with the editorial position.
Choose the companies and topics you are interested in – we will inform you in a personal newsletter as soon as they are mentioned in “Verslo žinija”, “Sodra”, “Registrų centura”, etc. in the sources.