Bank of Lithuania
2018-04-30
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The growth of the Lithuanian economy remains strong, while robust foreign demand and growing investment suggest further economic expansion.

Economic growth in Lithuania remains strong. According to the flash estimate published by Statistics Lithuania, in the first quarter of 2018 the country’s real GDP had grown by 3.5% over the year. Economic expansion is mainly spurred by growing exports; however, investment and household consumption contribute to it significantly as well.  Exports are mainly fed by strong growth in external demand and investment. The increase in the latter is accompanied by activity within the construction sector. Following a few years’ break, this sector is likely to be among the major drivers behind the growth of the Lithuanian economy again. Household consumption is mainly fuelled by robust wage growth. However, its growth moderated compared to the figures for the last few years, on account of the shrinking employment and inflation. 

Growing labour productivity, which has been increasing at the fastest pace in six years, is encouraging. It has been increasing within a number of economic activities, most strongly – within the information and communication technologies sector, industry and transport. The construction sector posts particularly strong growth in labour productivity as well, which is, however, related to a recovery in the demand for construction works rather than innovative or investment solutions. In 2016, orders for construction works declined substantially, yet construction companies, assuming that this decline will be of a temporary nature, did not hurry to undertake staff reduction, so the construction sector recorded a fall in labour productivity. Currently a reverse process is being observed: with the volumes of orders expanding and the number of employees remaining almost unchanged, labour productivity has been on the rise. 

Rising labour productivity is an important driver of economic expansion. Robust economic growth, which has been observed already for a few years, led to growth in output volumes and production factor needs, resulting, in labour shortage, which in fact determined strong wage growth. Thus the recovery in labour productivity is a significant factor which will contribute to economic expansion. Upon the recovery in labour productivity growth, the wage share in the value added, which had expanded for the last few years, stopped increasing. It has for more than three years been above historical average and if such trend persisted for a prolonged time, it would aggravate companies’ international competitiveness, as price pressures would increase more and more. 

This year, the development of Lithuania’s economy will remain strong; however, it will moderate somewhat compared to last year. According to the Bank of Lithuania, in 2018 the economy will grow 3.2%, in 2019 – 2.7%. In the coming quarters, economic growth will be hindered by weaker foreign demand due to more sluggish economic expansion in some major trade partners, e.g. Russia, Poland and Latvia. This reason will preclude enterprises within Lithuania’s tradeable sector from increasing their output as fast as they did it last year. One more important factor is the decreasing number of employed persons, which, combined with a weaker wage growth in the future, will limit household consumption growth. However, the adverse effects of the factors discussed above will in part be offset by a recovery in the flows of EU funds that will contribute to stronger investment growth and less pronounced price increases.