2019-09-25
The worsening international environment has so far left Lithuania’s economy unscathed, with its growth rates exceeding expectations. Nonetheless, global headwinds might soon start to bite. Compared to 2019, real GDP growth is projected to moderate considerably in 2020.
“Ongoing trade tensions have weighed on international trade, which sooner or later will undoubtedly have an effect on our open economy,” said Raimondas Kuodis, Deputy Chair of the Board of the Bank of Lithuania.
The ongoing Brexit saga has only exacerbated the already gloomy outlook. Although global growth has been decelerating, recovering flows of EU funds allowed Lithuania’s economy to maintain momentum. So far this year economic growth has been stronger than previously anticipated and more robust compared to last year. However, such trends are bound to reverse. With Lithuania’s main foreign trade partners trimming their growth outlook, economic development in the country is set to slow. Lithuania’s real GDP is projected to increase by 3.7% in 2019, before declining to 2.5% in 2020.
Despite the challenging external environment, economic activity in Lithuania has been spurred by investment and favourable market conditions. Having grown considerably a few years ago, investment boosted production capacities, thus reinforcing industrial growth and exports. The year 2019 saw higher absorption of EU funds: the flow of funds intended for investment increased by 68% year on year.
Labour market conditions remain favourable to workers: as labour shortages continue to persist, wages are growing rapidly. However, labour shortages seem to be no longer rising. This has been attributed to positive migration flows and a more cautious stance regarding demand for workers as global uncertainties elevate. As a result, wage growth is projected to reach 8.5% in 2019 and decline to 6.7% in 2020.
“Although prevailing labour market conditions seem to be in favour of employees and wages are rising faster than prices, we must remain vigilant, make responsible financial decisions and start saving for a rainy day,” said Gediminas Šimkus, Director of the Economics and Financial Stability Service at the Bank of Lithuania.
Compared to last year, inflation has remained broadly unchanged, exceeding the 2% mark. Similar trends should prevail as inflation is anticipated to rise to 2.2% in 2020. In terms of components of headline inflation, the largest increases are expected in service prices, which have been growing by an annual 5%. They should start declining only when wage growth remains firmly on a downward trend, which means that service prices will continue to push up headline inflation, accounting for roughly half of it.
For more information, see the Lithuanian Economic Review (English version published at the beginning of October) and Bank of Lithuania macroeconomic projections.