Crosswinds in the economy: stronger growth postponed but not abandoned
Although Lithuania’s economy picked up in the middle of the year, general economic activity remains subdued. This year, real gross domestic product (GDP) is projected to be slightly lower than last year but expected to grow by 2.1% in 2024. Inflation is falling rapidly as effects of cheaper raw materials and restored supply chains fade, and next year it will be most affected by rising services prices.
“The shocks in the recent years have made the country’s economic development trajectory look like a roller coaster. The plummeting at the start of the pandemic was replaced by a robust recovery, while this year’s growth curve is still being pressed down by the effects of russia’s war and price shocks. They are more persistent, and the country’s economy, affected by adverse economic winds, will return to a more balanced stage of development next year,” says Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania.
According to the projections of the Bank of Lithuania, the country’s economy will contract by 0.6% this year. This contraction is not so bad as projected in June (-1.3%), mainly due to an increase in GDP in the second quarter of 2023. The brighter outlook is clouded by the industry which has been narrowing for a year and a half. The situation in the industry is undermined by the deteriorating situation in main export markets, especially in the euro area, the increased cost of borrowing, and the fall in temporary orders following the pandemic. The production capacity utilisation rate in this activity is lagging far behind, and stocks of finished products produced by industrial enterprises have increased markedly. However, not all economic activities are undergoing a downturn. As projects funded by the EU are being implemented, there is an uptick in construction work, especially the construction of engineering buildings. The situation has also recently improved in the transportation sector, but growth in these sectors does not offset the impact of declines in other economic activities.
Economic activity is also dampened by falling private consumption. While labour income has recently been rising faster than prices, people are not inclined to consume more. Compared to last year, private consumption is expected to be 0.4% lower this year. Along with the rise in real income, private consumption will pick up next year (2.7%), contributing to GDP growth.
The labour market situation remains favourable for employees. The unemployment rate is close to 6% and it is no higher now than it was before the shocks of recent years. Anticipating that the economy and demand will pick up in the coming years, companies are making efforts to retain their existing staff. This year, the average wage is projected to be 12.4% higher than last year, and a further increase of 9.8% is expected next year. However, wages are not growing as fast and the number of employed persons is falling in activities that are undergoing difficulties, such as manufacturing, trade and real estate.
Weaker developments in the world economy are easing price pressures. Supply chains have normalised, and prices of energy resources have receded from last year’s highs. Furthermore, the overall demand is being cooled down by monetary policy decisions of the European Central Bank. Average annual inflation is projected to fall to 8.8% this year and 2.6% next from last year’s 18.9%. Inflation is expected to be mainly driven by the continuing rise in the cost of services. Rising wages, which account for a sizeable and higher share of costs than in other sectors, are driving up the prices of services.
More details on the projected economic developments can be found on the website of the Bank of Lithuania.