2026-06-17
Lietuvos bankas: Energy shock will drive up inflation but the economy remains resilient
The ongoing conflict in the Middle East is increasing global economic uncertainty and driving up energy and other commodity prices. Nevertheless, the Lithuanian economy remains resilient and is expected to continue growing in the coming years, although short-term fluctuations will be unavoidable. According to the latest projections of Lietuvos bankas, inflation will be above 5% this year due to rising energy prices but will decline steadily in subsequent years.
‘The conflict in the Middle East is already affecting the prices of energy and other commodities but the Lithuanian economy is prepared for this shock. Reduced dependence on imported energy, rising labour productivity and strong financial standing of households suggest that the impact of the current energy crisis on the economy will be less severe than in 2022. In the coming years, economic growth will be driven by rising investment, higher household incomes and domestic consumption,’ says Gediminas Šimkus, Chair of the Board of Lietuvos bankas.
Lietuvos bankas projects the economy to grow by 2.7% this year, slow down to 2% in 2027 before accelerating to 3.3% in 2028. Compared to April, this year’s growth forecast was revised downward by 0.4 percentage points. This was not due to weaker fundamentals but rather due to first-quarter results that were more modest than expected.
These fluctuations in economic activity will be largely caused by the new possibility to withdraw funds from the 2nd pillar pension funds, which will increase the disposable income of households. It is projected that households will spend a significant share of the withdrawn funds on goods and services this year, thereby accelerating economic growth. By 2027, the positive impact of the earlier withdrawals from the 2nd pillar pension funds is expected to fade, and economic growth is therefore projected to slow. In subsequent years, economic growth will return to a more normal development path, and any further withdrawals from the 2nd-pillar pension funds will have only a limited effect.
Economic growth this year will also be supported by a significant increase in government investment, related to both defence spending and other needs. Lietuvos bankas projects investment to grow by 10.1% in 2026, slow down to 3.7% in 2027 and go up by 4.6% in 2028
Foreign demand, which grew significantly last year partly due to frontloading before higher tariffs, will grow more moderately this year, thereby constraining export growth. The conflict in the Middle East will also contribute significantly to this. Economic growth in Lithuania’s major trading partners will be dampened by higher energy prices, potential supply chain disruptions and tighter financial conditions on global markets.
Lithuania’s exports are projected to grow by merely 0.4% this year, but growth is expected to pick up to 3.6 and 3.7% in 2027 and 2028 respectively.
With tensions and uncertainty in the Middle East persisting and energy prices remaining elevated, average annual inflation is expected to be 5.1% this year and annual inflation may be even higher in some months this year.
In the coming years, inflation is expected to decline steadily and, by the end of the projection horizon, return to a level typical of an economy approaching the living standards of Western economies. This will be driven primarily by declining energy prices, slower wage growth and weaker impact of taxes. Average annual inflation is projected to be 3.0% in 2027 and 2.6% in 2028.
The labour market remains favourable for workers, with wage growth continuing to be supported by strong labour demand. Unemployment, which is expected to be 6.8% this year, is projected to drop to 6.7% in 2027 and 6.6% in 2028.
Average wages are projected to go up by 8.7% this year, however, as economic growth slows in 2027, wage growth will decelerate to 6.9%. before picking up to 7.2% in 2028.
Throughout the projection horizon, wages will outpace prices, so the real purchasing power of the population will increase.
Nevertheless, the future of the conflict in the Middle East remains shrouded in considerable uncertainty. The duration and intensity of the conflict could have a significant impact on energy and other commodity prices, and consequently on the development of the Lithuanian economy. Therefore, in addition to the baseline scenario, the Eurosystem has assessed three alternative economic development scenarios.
In all scenarios analysed, the Lithuanian economy would continue to grow; however, the less favourable scenarios project higher inflation and slower economic growth. The strongest impact would be in 2027 and would gradually diminish thereafter but would not disappear entirely.
For more details on the expected economic development, see the website of Lietuvos bankas.