Projections: economic development is constrained by sluggish demand, the economy could potentially gain momentum
Lithuania’s economy has been at about the same level for the second year in a row, i.e. it is neither expanding nor weakening. Next year it will exit the period of stagnation as a result of private consumption driven by real income growth and recovering demand in export markets. However, the full potential of the economy will not be exploited, and the growth of gross domestic product (GDP) will be slower than the multiannual average in 2024.
“The country’s economy has weathered the strong shocks of the war in recent years as well as the aftermath of the pandemic somewhat earlier and has avoided a more significant downturn, but there is still no strong pre-pandemic growth on the near horizon. The economy has the potential to expand faster, but the return to more normal growth is hampered by the slow recovery of domestic and external demand,” says Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania.
The Bank of Lithuania forecasts that the overall result of this year will indicate economic stagnation – Lithuania’s GDP will slightly shrink (by 0.2%). This projection has been revised upwards compared to September, when a 0.6% drop was forecast. The economy is expected to grow by 1.8% in 2024, slightly lower than previously projected (2.1%). Weak demand for Lithuanian goods and services in the main export markets and cautious consumption in the domestic market, driven by uncertainty, hinder faster economic growth. According to the ECB’s latest projections, the economy of Lithuania’s main export partner, the euro area, will grow by 0.8% in 2024, a fifth less than previously projected. The sluggish growth of international markets prevents a faster recovery of Lithuania’s industry, which is highly export-oriented and generates a significant share of added value. Lithuania’s exports are expected to increase by 0.5% next year, after a 5.3% decline this year.
Private consumption has the potential to kick-start the economy next year, and private consumption can be the one to boost the development. The real household income, i.e. the income adjusted for falling inflation, has already started to increase this year. After a substantial fall in purchasing power last year, this year residents were cautious, consumed less and saved more. Such behaviour is similar to that during the 2008-2009 crisis, when, following economic shocks, residents consumed less and saved more even in the face of a fall in real income. Private consumption in Lithuania contracted by 1.7% this year, with potential to grow in 2024. Consumption is projected to grow by 2.4% next year and will significantly affect overall economic development.
Investment will also contribute significantly to economic growth. This year a strong rise in investment has protected the economy from a deeper recession. The use of European Union (EU) support contributes significantly to the growth of investment. In the first nine months of this year, inflows from EU funds that are used for investment increased by around a quarter year on year. This contributes to the growth in both the general government and private sector investment and increases the volume of construction work. The total investment growth rate is expected to reach 8.6% this year, and next year it will increase by nearly 4%.
The price level in Lithuania has remained almost unchanged for more than half a year, whereas the annual inflation rate is declining at a rapid pace. Inflation will fall to 2.5% next year after reaching 8.8% this year. Lower energy prices will have a dampening effect on inflation, while higher prices of services and industrial goods will contribute the most to the overall price increase.
The situation in the labour market is favourable for employees. Companies are trying to retain existing employees because there is a broad consensus that the economic situation in foreign countries and Lithuania will begin to improve shortly in 2024. The average wage, which has increased by 12.2% this year, is expected to rise by nearly a tenth next year.
The current labour market situation poses challenges for businesses related to competitiveness. Today, real wages are rising and labour productivity is falling. These trends are not sustainable, meaning that, in the long term, businesses will have to aim for higher labour productivity or slower wage increases.
More details on the possible economic forecasts can be found on the website of the Bank of Lithuania