Given stronger domestic demand, the Bank of Lithuania upgraded its GDP projections for 2019
Despite the current international climate, growth in Lithuania remains robust, driven by the strong upturn in exports and domestic demand, particularly, private consumption. In view of the positive developments, the Bank of Lithuania has revised its GDP projection for 2019 upwards to 3.2% (the March 2019 projection was 2.7%). It has also slightly downgraded the outlook for real GDP growth in 2020 to 2.5% (the March projection was 2.6%). The forecast for inflation remains unchanged: according to current projections, average annual inflation is expected to be 2.4% in 2019 and 2.3% in 2020.
“Although differences in Lithuania’s and global growth momentum are expected to prevail for some time, economic growth in the country will gradually slow. Such trends have been reflected in the Bank of Lithuania’s economic projections. Even though investment could boost the growth potential, uncertainty over global economic development and weaker growth in EU funds will constrain investment in Lithuania. Growth is also supported by labour resources – due to intensified immigration, employment in the country has recently risen. However, such tendencies may not be sustained as older cohorts leave the workforce in higher numbers than younger cohorts enter. Immigration flows might simply fail to offset such demographic trends,” said Gediminas Šimkus, Director of the Economics and Financial Stability Service at the Bank of Lithuania.
The Bank of Lithuania economists have noted that economic activity in Lithuania is above its potential. Interestingly, the weaker external environment is not only hampering domestic growth, but also prevents significant imbalances. Companies that are better positioned for competition and continue to prioritise investment and productivity growth find it easier to withstand emerging challenges. Even with lower external demand and significant increases in labour costs, more vigorous growth in their labour productivity puts such companies on a stronger footing. Other firms are more dependent on domestic and external demand, hence a less favourable international environment may curb their development and activities. This is particularly important considering the fact that adverse trends in the global economy are not necessarily short-term.
The Bank of Lithuania has left its projections for average annual inflation unchanged: it is expected to decline to 2.4% in 2019 and 2.3% in 2020. Given ongoing wage growth, service prices continue on their upward path. Currently they account for more than half of headline inflation, while its fluctuations are mainly driven by the steeper food and fuel prices.
Labour market conditions are changing, though the overall market assessment remains unchanged. The share of firms claiming that labour shortage hinders their activities is no longer increasing. Wage growth in the private sector has been losing steam for several consecutive quarters, yet still remained high, outpacing growth in value added.
The latest economic projections are available on the Bank of Lithuania website.