Projection: Lithuania’s economy will maintain growth, and resilience is strengthened by Ukrainians entering the labour market
Lithuania’s economy is showing resilience in the aftermath of russia’s war against Ukraine, with the growth projection at 2.5% this year, which is even higher than the September projection of 2.1%. The projection for gross domestic product (GDP) growth in 2023 is revised up by 0.4 percentage points to 1.3%. The smooth integration of 25,000 Ukrainians, mostly war refugees, into the country’s labour market has also helped to strengthen resilience.
“Lithuania’s economy has shown greater resilience in the face of successive crises than many expected. Although uncertainty remains very high, we have improved our projections for economic development, given the favourable labour market trends for employees, the positive impact of budget-related decisions and energy price developments,” says Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania.
However, the stabilisation is fragile, and the balance of risks is negative, i.e. there is a higher probability of a downward revision of the economic outlook in the future rather than an upward one. The greatest uncertainty is linked to the external environment: the developments in the world economy are so far exceeding expectations, but its outlook is worsening. russia’s war against Ukraine remains the biggest risk factor for the world economy. Military action, sanctions and the response to them continue to have a significant impact on global commodity prices, especially of energy and food, and their volatility.
Although the energy price shock has had a severe impact, the country’s economy continues to grow. There are early signs that we are likely to experience only a relatively mild stagnation at the turn of the year. For instance, sales in the manufacturing sector have stopped declining for three consecutive months. Taking price effects into account, retail and construction sales have not declined significantly in recent months. The economic situation is also not showing any significant deterioration in both business and household confidence indicators. The latter even improved significantly in October and November. This was also influenced by the announcement of publicly funded measures to mitigate the energy price shock.
The labour market situation remains favourable for the employed, with strong demand and a growing number of people in employment in the third quarter, which was 5.5% higher than at the end of last year. This rapid employment growth was supported by a significant increase in the labour force, driven both by an increase in the working age population and a higher participation rate. In the third quarter of this year, the latter rose to its highest level since the publishing of data. The main contributor to the increase in the working age population has been the marked increase in the number of immigrants. In January–November, almost 52,000 more people entered Lithuania than left it. Refugees from Ukraine fleeing the war caused by russia account for the major share of these arrivals. Currently, 25,000 of these people have entered the Lithuanian labour market, which is almost 2% of the Lithuanian labour force, and contribute to reducing tensions in the labour market. Wage growth is projected at 12.8% this year (based on the September projection, it was forecasted to stand at 12.7%) and will go up to 9.1% next year (6.3% according to the September projection).
If there are no unexpected shocks in commodity markets, the peak in annual inflation will be a thing of the past. Annual inflation is expected to continue to decline, amid the strengthening of the higher base effect, the impact of lower commodity prices and the easing of supply chain frictions. Energy prices are the main driver of inflation this year. Energy price increases are expected to moderate significantly next year, with food prices being the key driver of inflation. Against this background, headline inflation is projected to be 18.9% this year, before falling to 9.5% next year.
More details on the projected economic developments can be found on the website of the Bank of Lithuania.