2024-12-19
Lietuvos bankas’ projections: improving international economic environment, domestic consumption and recovering investments to accelerate economic growth
The Lithuanian economy has withstood the shocks of recent years and, after two years of stagnation, has bounced back to growth. In 2025, economic development should be more positively influenced by the international economic environment, higher demand for Lithuanian goods and services in export markets, growing private consumption, and recovering investments. This will mean that the acceleration of Lithuania’s economic growth, which will be over 2% this year, will speed up further next year and the growth will exceed 3%.
“I am delighted as this has been a good year for our economy. The country’s economy has successfully tackled challenges, many of which were external, and has bounced back to growth. I see the end of the year as an opportunity to define and evaluate our strengths and continue to build our future on the existing economic foundation next year,” says Gediminas Šimkus, Chair of the Board of Lietuvos bankas.
Lietuvos bankas forecasts that this year Lithuania’s gross domestic product (GDP) will increase by 2.4%, which is 0.2 percentage points more than projected last September. In 2025 and 2026, GDP is expected to grow by 3.1% each year and by 3% in 2027. Economic growth will be held back from growing even faster by poor opportunities for more efficient use of labour resources, a deteriorating demographic situation and less growth in trading partner markets than in the previous decade.
Recently, growth in Lithuania has been observed in many economic activities but what stands out is the added value created by business-oriented services. Rather than the economy as a whole, more growth is seen in information and communication, professional, scientific, administrative, customer and other related services, accounting for about 40% of overall economic growth within the three quarters.
As domestic demand recovers, so do household-oriented services, including trade, arts, entertainment, recreation and other activities. Private consumption is growing noticeably less than personal income, the former’s growth being mainly due to higher demand for short-term consumer goods and services. The acquisition of durable consumer goods is hampered by persistent geopolitical uncertainty, the monetary policy previously tightened and other factors.
After decreasing by 0.3% in 2023, real private consumption is projected to grow by 3% this year and by 3.7% per year between 2025 and 2027.
The manufacturing sector has also strengthened this year. With the economic situation of Lithuania’s export partners improving, output has grown in many major manufacturing industries. However, businesses do not make full use of their production potential, with the level of production capacity utilisation still lower than before the onset of the shocks of the last few years and lower than the long-term average.
This year, Lithuania’s exports are expected to increase by 2.2%, by 2.5% next year, and by 3.6% and 3.7% in 2026 and 2027 respectively.
Investments, which grew by more than 9% last year, is projected to contract by 2.3% in 2024, but this will only be a temporary drop. With funding from EU support funds increasing, the impact of the monetary policy previously tightened fading away and internal and external demand going up, the volume of investments is set to increase by 6.1% next year, by 4.8% in 2026 and by 4.4% in 2027. A positive impact on investments is also likely to result from past increases in corporate profits.
The labour market situation remains relatively stable, which is also true to the total number of the employed, with the exception of the transport sector. Unemployment rates also remain largely unchanged but are higher than before the start of the period of slower economic development which started in 2022. Unemployment is stabilising in many social groups, with the exception of the youngest group where unemployment continues to rise noticeably. With unemployment higher than two years ago, the duration of the unemployment period is increasing, and the number of long-term unemployed has also recently gone up.
It is projected that the unemployment rate will reach 7.4% this year. It should drop to 7.1% in 2025, 6.9% in 2026 and 6.7% in 2027. Employment is expected to rise by 1.8% this year but it is likely to drop by 0.1% in 2025 and 0.3% in both 2026 and 2027.
With higher unemployment, continued positive net international migration and persistent uncertainties about the prospects for international economic development, pressure on wages is less pronounced. This is particularly evident in the private sector where the wage growth has been slowing down for several years in a row.
Following an increase of 12.6% last year, average wages are projected to increase by 10.3% in 2024. In 2025, their growth will slow down to 8.7%, 8.1% in 2026 and 7.5% in 2027. Notwithstanding the projected growth slowdown in wages, it will continue to be faster than before the onset of the shocks of the last few years. As labour costs grow more than the total nominal value added, price pressures are getting more prominent and the competitiveness of less advanced businesses is deteriorating.
Labour costs are projected to remain among the most important factors contributing to headline inflation, which will also be increasingly influenced by a gradually improving international economic environment, rising prices of some energy commodities and rising indirect taxes.
This will mean that average annual inflation, which is set to reach 0.8%, will return to the normal level typical of the Western economies approaching subsistence levels as early as next year. Inflation is projected to reach 2.3% in 2025 and 2.6% in both 2026 and 2027.
For more details on projected economic developments, see Lietuvos bankas’ website.