2026-04-02
Lietuvos bankas: the economy will grow rapidly, but inflation will be higher than expected
In the coming years, the Lithuanian economy will continue to grow rapidly, but, according to the latest projections from Lietuvos bankas, inflation will be higher than previously forecasted. The economic developments will be most affected by fluctuations in energy prices, while growth will be driven by rising household income, investment and domestic consumption.
“The military operations in the Middle East, the duration and intensity of which is highly speculative, are the key factor altering the economic outlook. We can all see their impact on gas station price displays, hence in the coming years inflation will be higher than previously anticipated. Nevertheless, this year Lithuania’s economic growth will remain robust, driven primarily by rising household income and investments,” says Gediminas Šimkus, Chairman of the Board of Lietuvos bankas.
Lietuvos bankas has prepared two possible economic development scenarios. According to the baseline scenario, disruptions in energy supply are expected to continue until the fall of 2026, while the energy infrastructure of the region will not suffer any additional significant damage. The adverse scenario is that disruptions would persist until the end of this year, and the infrastructure would suffer significant damage.
According to the baseline scenario, average annual inflation is expected to rise up to 5.1% this year, reduce to 3% next year and go back to the 2.5% level, typical of Western economies approaching the cost-of-living threshold only in 2028. The adverse scenario shows that inflation would rise to 5.8% this year, reach 4.1% in 2027 and remain above 3% in 2028.
Higher energy prices will be the main driver of inflation. Rising energy costs will also contribute to the rise of the prices of other goods and services. Withdrawals from second pillar pension funds and higher indirect taxes will also contribute to rising inflation.
According to the baseline scenario, the Lithuanian economy is anticipated to grow by 3.1% this year, slow to 2% in 2027 and accelerate again to 2.9% in 2028. The adverse scenario is that growth would be more moderate and reach 3.1%, 1.6% and 2.5%, respectively.
Fluctuations in economic growth are most influenced by the increase in household disposable income caused by the possibility of withdrawing funds from second pillar pension funds. This should lead to significantly higher private consumption this year, but its growth will contract significantly in 2027, as the majority of the withdrawals will already have been spent.
Economic growth this year will also be supported by a significant increase in public investment, both related to defence needs and other requirements. Foreign demand, which grew last year in part as a result of intensified stockpiling ahead of the implementation of higher tariffs, is expected to grow more slowly in 2026 and limit export expansion.
Investment grew rapidly already last year, facilitating the boost in labour productivity, which also contributes significantly to the economic growth. The growth in labour productivity reaches a long-term trend and allows for further increases in wages and household income.
Labour market conditions remain favourable for workers, but demographic trends increase pressure. The working-age population is shrinking, the impact of migration is weakening and the participation rate has already reached a high level. As a result, the employment numbers fell last year for the first time since 2021.
Wage growth is further supported by strong labour demand – in most economic sectors the vacancy rate exceeds the long-term average. Wages rose by more than 8% in 2025; the wage growth is expected to approach 8% this year and stay at 7% in the following years.