2024-03-19
Projections: consumer purchasing power will strengthen, but companies’ ability to continue increasing wages as rapidly is diminishing
For more than two years, stagnation has been hampering Lithuania’s economy. This year, the economy will begin to recover as wages rise faster than prices, consumer purchasing power and consumption strengthen, and public sector investments are abundant. GDP is forecasted to increase by 1.6% this year after a 0.3% drop last year. However, the economy will only return to a more typical multi-year growth pace next year, once Lithuania’s foreign trade partners start to recover.
“Lithuania’s economy is still lagging behind its long-term growth trajectory – it has the potential to grow roughly twice as fast as projected this year. We will increase economic momentum to normal levels only when other crucial drivers of economic growth – industry and exports – contribute to recovering consumption and public sector investments,” says Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania.
The Bank of Lithuania projects an economic revival in the second half of this year, and until then economic growth will remain sluggish. The most significant drag on economic activity continues to be the weak demand in export markets and constrained re-exports. Unfavourable external trends should be offset by gradually increasing domestic demand, especially household consumption. Having resumed growth at the end of last year, this consumption trend is expected to continue in the future. After contracting by 1.1% last year, private consumption is projected to increase by 3% this year. The consumption projection for 2024 has been revised upwards by 0.6 percentage points, or a quarter. The preconditions for this improved projection is the rapidly increasing household real income, for example, the average wage in Lithuania is rising much faster than prices. Last year, the average wage increased by 12.6%, while average annual inflation stood at 8.7%. This year, wages are expected to rise three times faster than projected inflation (10.3% and 3.1% respectively). The latest wage projection has been improved by a tenth, and inflation is expected to contract almost a sixth more than previously forecasted.
The situation in the labour market continues to be favourable for workers, with their number reaching 1.47 million, the highest since the global financial crisis of 2008‒2009. This was significantly influenced by a shift in migration trends. In 2023, more foreigners and Lithuanian citizens came to Lithuania than left the country. The positive migration balance offset the negative impact of natural population decline – the number of permanent residents in Lithuania increased by more than 29 thousand in 2023. Most of the newcomers already have employment contracts; with the workforce growing rapidly, the unemployment rate remains broadly unchanged and close to historical lows. This year, unemployment is expected to be at 7%, compared to 6.8% last year. However, there is also an unsustainable trend in the labour market: wages are increasing rapidly, but productivity is not growing. This situation cannot continue for long if economic growth and productivity do not recover. In other words, the ability of companies to continue increasing wages as rapidly as before is diminishing.
Difficulties in foreign markets are resulting in challenges faced by Lithuania’s main exporter – the industrial sector. The production volume of its products is still lower than a year ago. The economic growth of the euro area, which is Lithuania’s main trading partner, means that this year the external demand for goods and services produced in Lithuania will still be weak and is expected to pick up only from 2025.
Negative trends in export markets are mitigated by last year’s significant increase in investments, especially in the public sector. It allocated a larger portion of funds to construction projects, which contributed to the rapid growth in investments in roads and electricity grid infrastructure. A significant part of these projects is financed by European funds. After increasing by 10.6% last year, investments are expected to grow by another 4.5% this year.
More on the projected economic development can be found on the Bank of Lithuania website and in the publication Lithuanian Economic Review.