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Forecast: economic stagnation is almost over with emerging signs of recovery

Forecast: economic stagnation is almost over with emerging signs of recovery

As growth has finally resumed, household consumption and a high level of investment are reviving Lithuania’s economy which has stagnated for over two years. As the demand for Lithuanian goods and services picks up in export markets along with the easing of monetary policy, this year Lithuania’s economy is projected to grow by almost 2%, before accelerating to slightly over 3% next year.

“We can finally see the long-awaited changes in the country’s economy – the stagnated economy is showing signs of recovery. Our earlier forecast is materialising: this year we will experience a recovery and the economic development should return to a more usual long-term pace next year,” says Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania.

The Bank of Lithuania projects that this year Lithuania’s gross domestic product (GDP) will grow by 1.9%. Compared to March, the forecast has been revised up by 0.3 percentage points. The GDP forecast for 2025 and 2026 remains unchanged – the indicator should increase by 3.1% and 3.3% respectively.

Household consumption expenditure is the main driver of economic growth. In the first quarter of this year household consumption expenditure exceeded the highest level recorded before the inflation surge. It will be further supported by the continued rapid growth in household income as well as slower price increases, improving household expectations and a favourable labour market situation for workers. Following a 1.1% decline last year, consumer expenditure is projected to increase by 3.4% this year and by 3.7% both in 2025 and 2026.

The development of exports, the other driver of the economy, will be positively impacted by the continued competitiveness and recovering foreign demand. In 2024–2026, foreign demand will grow slower than the long-term average, therefore, export growth should be more sluggish than before the COVID-19 pandemic. Total exports should grow by 1.2% this year and by a further 3.7% next year.

Larger investments will also contribute to GDP growth. The level of investment, compared with GDP, stood at 24% last year and was the highest since the global financial crisis. Investment volumes should expand by 4.5% this year and by 4.1% next year. The increase in EU support funds will significantly contribute to their growth and they will also benefit from the economic growth in the medium term.

The labour market remains favourable for workers, with tensions easing and returning to a more sustainable level. Wages should continue to grow at a relatively rapid pace but slower than in the previous year. The average wage is projected to increase by 10.2% this year, while the growth will slow down to 8.5% next year. However, from a long-term perspective, even such slower wage growth is still relatively rapid. For example, over the decade before the pandemic shock to the economy, wages in Lithuania grew at an average rate of 5.5% per year.

Along with the decline in commodity prices and easing of labour market tensions, the monthly price developments will be close to the usual changes. It is projected that inflation will stand at 1.2% in 2024. As the downward effect of commodity prices has faded, inflation will rise to 2.4% in 2025 and 2026. Prices will grow at a pace that is normal for Lithuania, which is still approaching the living standard of Western European economies.

Over the 20 years of the EU membership, Lithuania has significantly reduced the gap with Western Europe from 45% of the euro area average in 2004 to 83% in 2023. This is the fastest increase in the living standard among the Baltic countries. However, it will not be easy to fully reach the euro area average. In the future, Lithuania will have to cope with public expenditure related to population ageing, for example, for pensions and health care. With a view to redirecting the economy towards the creation of higher value-added goods and services, investment into innovation, research and intellectual property should be doubled. Based on the current economic developments in Lithuania and the euro area, the Lithuanian population should reach the average living standard of the euro area about 2037.