11/05/2021 8.17

Financial health of Lithuanian households during COVID-19

Statistics reveal demand for consumption loans in Lithuania is shrinking, with consumer loan portfolios of banks and credit unions falling 10% in a year. Despite declining interest rates, similar trends are observed in the non-banking sector.

The contraction of the consumer loan market has been linked to declining supply attributed to the impact of COVID-19, however evidence points to the recovery of Lithuanian households reducing the appetite for loans.

Macroeconomic indicators show that households' access to credit became wider

Unemployment in Lithuania began to increase in March 2020, and has climbed up from 6.1% to 9.3% (In April 2021, unemployment decreased to 9.0%). At first glance, this upwards trend may not seem useful to the consumer lending market as unemployed persons have no access to credit. However, despite the turbulence brought about by the pandemic, household incomes continue to grow rapidly. Statistical data reveals that wages increased by 13% in 2020. Especially significant growth was fixed in the public sector, where salaries of employees increased by 15%.

The improvement in the financial situation of households can be seen in deposit statistics. In February 2021, deposits from Lithuanian households amounted to EUR 18.4 billion, a EUR 3.3 billion increase on the previous year. This is one of the largest growth rates in the EU, and sends a strong signal that the liquidity position of Lithuanian households is strong.

Lower share of households have financial difficulties

Results from a monthly survey performed by Statistics Lithuania offers unique insight into how local households perceive their own financial health. The analysis revealed that the financial position of Lithuanian households has remained steady over the course of the year. 52% of respondents reported being able to make savings, showing a 2% increase on the previous 12-month period. Only 3% of households expressed that they were obligated to borrow funds, a number consistent with 2020.

The number of households experiencing financial difficulties has decreased by 1.4% over a 12-month period, with 5.3% of no-child households stating that paying taxes, utilities or credits was a burden. The financial health of households with children has also improved, with 9.1% facing financial difficulties, a number 0.8% less than measurements taken a year ago.

Improved household finances are further evidenced in Lithuanians planning large purchases, and being in positions secure enough to increase their savings. In April 2020, as a result of COVID-19, there was a huge gap of - 40 percentage points between households planning large purchases and those unable to. A swift recovery ensued and by March 2021, no difference was observed. The variation between households with the ability to make savings and those without, increased from 5 percentage points to 16.

Personal expectations of improved finances are also increasing. Approximately 25% of households expressed a belief that their financial position will improve over the next 12 months (5 percentage points more than a year ago). Only 9% of respondents expect their financial status to remain unchanged (6 percent less than a year ago). The consumer expectations index confirmed the trend, increasing from -16 percentage points in April 2020 to 0 in March 2021.

The outlook for financial health in Lithuanian households is positive. Despite the challenges faced during the pandemic, the financial situation of the population in Lithuania and corresponding access to credit is strengthening. As a result, the contraction of the consumer credit market should be linked to demand rather than supply: the improving financial circumstances are reducing the willingness of households to borrow for consumption purposes. The resulting challenge for financial institutions will be finding ways to attract customers.