Inflation is forecast to run at 1% in 2024, down from the previous projection of 1.2%.
„The Lithuanian economy is back on track to growth after a two-year freeze,“ Gediminas Šimkus, board chairman of the Bank of Lithuania, told the bank’s event held to present the country’s economic review.
The Lithuanian economy has successfully seized the growth opportunities that have opened up and got back to the growth path in the first half of this year following two years of stagnation. With private consumption growing strongly and demand for Lithuanian goods and services recovering gradually on export markets, the Lithuanian economy is projected to grow by more than 2% in 2024 before accelerating to above 3% next year, the central bank said in its press release on Tuesday.
„Although it is encouraging to see the Lithuanian economy finally returning to growth, autumn is an excellent time not only to count our chickens but also to roll up the sleeves and prepare for faster economic growth. We foresee growth to pick up pace next year already, when the economy will be boosted by stronger foreign demand and increasing EU support for investment. The benefits of this growth will also be felt by residents as their real incomes will go up and consumption will continue to grow,“ says Šimkus.
The central bank’s GDP projection for 2025 and 2026 remains unchanged, with the economy expected to grow by 3.1% and 3.3% respectively.
In Lithuania, the overall economic growth is currently largely driven by the services sector, with the information and communication sector standing out as its growth has been outpacing that of the entire economy for some time now. In the first half of 2024, this industry accounted for around a quarter of overall economic growth.
Professional, scientific, administrative and support services have also contributed quite significantly to overall economic development. Although to a lesser extent than many other activities, manufacturing, which contracted significantly in 2023, is bolstering economic activity. Currently, the situation in all major manufacturing industries has improved or at least has largely stopped deteriorating, compared with a situation a year ago.
Private consumption has had an important impact on economic growth in Lithuania given a slower recovery of global markets, in particular the euro area. Household consumption has been rising sharply for about a year now and is already close to its peak recorded before the surge in inflation caused by the energy price shock. Its further growth will be supported by a favourable labour market situation, lower inflation and positive household sentiment.
Real private consumption, which contracted by 1% in 2023, is projected to increase by 3.6% this year and 3.7% both in 2025 and 2026.
Lithuanian exports have also been recovering moderately from last year’s recession benefiting from the retained competitiveness. However, foreign demand growth in 2024 has been slower than expected and is projected to be more modest in 2025–2026 than before the COVID-19 pandemic. Total exports are expected to grow by 1.2% this year, 3.1% next year and 3.8% in 2026.
At the same time, investment, which grew by more than a tenth last year, is projected to contract by 3.6% in 2024 but this will only be a temporary decline. Thanks to increasing EU support and stronger economic growth, the investment volume is expected to go up by 6.6% next year and 5.1% in 2026.
The labour market situation remains good, but there have been some unfavourable developments. Over the last few months, the total number of persons employed has decreased mainly due to economic activity in the transport sector. The unemployment rate, which started to rise in 2022, has not declined so far either and remains high in nearly all social groups.
The unemployment rate, which stood at 6.8% in 2023, is projected to go up to 7.4% this year. It is expected to fall to 7.1% in 2025 and 6.9% in 2026. Employment should increase by 1.6% this year before falling by 0.4% and 0.3% in 2025 and 2026 respectively, the central bank said.
With growing unemployment, continued positive net international migration and a rather uneven recovery in various sectors of the economy, the labour shortage is less pronounced and the pressure on wages is easing. The average wage, which rose by 12.6% last year, is projected to go up by 9.8% in 2024 and its growth rate to slow down to 8.5% in 2025 and 8.1% in 2026.
Despite this projected slowdown, the growth of wages will continue to be faster than in 2010–2020, when wages grew at an average annual rate of 5.5%.
Wage growth is also being held back by labour productivity, which has been stalling for three consecutive years. This productivity trend is underpinned by the sluggish development of the exporting sector, commodity prices which remain higher than a few years ago, and the desire to retain existing workers in the expectation that demand (especially on foreign markets) will increase eventually.
Average annual inflation is projected to be 1% this year as labour market tensions ease and commodity prices stabilise. As the dampening effect of prices of energy resources fades, inflation will return to the normal level typical of an economy approaching the living standards of Western economies. Inflation is projected to be 2.5% in 2025 and 2.6% in 2026.