Lithuania’s economic development and outlook
19/03/2024
Global economic activity remains subdued. In the coming years, it is expected to remain slightly lower than over the past decade. Such developments in the world economy are still strongly influenced by the dampening effect of tighter monetary policy. It affects all major global economies – the US, China and the euro area – through tighter financing conditions and a gradually cooling labour market. The events in the Red Sea are deemed to have had only a limited impact on global economic developments thus far, and the delivery times of products have been only relatively slightly prolonged compared to 2021–2022, when global supply chain bottlenecks were particularly big. It is noteworthy that the economic development in the euro area, Lithuania’s most important trading partner, is the least favourable among the world’s major economies. In the first half of 2024, economic activity in the euro area will remain very sluggish due to the waning positive momentum of the reopening of the economy, competitiveness challenges, tight financing conditions and increased consumer uncertainty. However, rising household purchasing power, as a result of falling inflation and continued wage growth, as well as increasing government spending and recovering external demand should lead to a rebound in economic activity in the euro area in the second half of the year. Rising household income, increasing external demand and the fading effects of tighter monetary policy should also contribute to a further recovery of the euro area economy in the medium term. As a result of such economic developments in Lithuania’s most important trading partner, this year external demand for the goods and services produced in Lithuania will remain sluggish and should rise more rapidly from 2025 onwards. Nevertheless, the developments in external demand will be noticeably slower than the long-term average.
Lithuania’s economy has been sluggish for two years now, with the positive effects of slowly recovering domestic demand being offset by the challenges faced by exporters. The improving domestic demand is positively affected by both investments and household consumption. In 2023, investment was driven mainly by the general government and industry, where the reconstruction of an oil refinery accounted for around one-third of investment. The general government channelled a larger share of its funds towards construction projects, thereby affecting the rapid growth of investments in roads and electricity grid infrastructure. Investment in these two groups of structures accounted for more than two-thirds of the total increase in construction works last year. A significant share of these projects was financed by European funds. Household consumption started to pick up again in late 2023. Its recovery was mainly driven by the purchasing power which had been recovering for several quarters already, the continued favourable situation in the labour market and the gradually improving sentiment. Households remain cautious, however, and are still reluctant to take on higher financial costs.
The decline in exports of goods and services is affected by sluggish external demand, limited re-exports and a correction of export market shares. Re-export developments are strongly influenced by the tightening of checks of dual-use goods, which have significantly restricted re-export flows to the Commonwealth of Independent States. The correction of export market shares is mainly due to structural factors, which significantly affected only a few groups of goods. The exports of wood and furniture products were mainly affected by the drop in demand for these products as the tightening of the monetary policy slowed down the development of the real estate sector in major trading partners. Demand for chemical products was reduced by the retreat of the COVID-19 pandemic, while the reopening of China after the pandemic and the increased flow of these products from Asia also lowered the prices of chemical products. Furthermore, sanctions, which partially suspended the activities of AB Lifosa, allowed foreign producers of phosphate fertilisers to take over the available market share. The poorer agricultural harvest, the value of which was by one-fifth lower in 2023 than in 2022, also contributed to the correction in export market shares. Given the nature of these factors, the recent correction in export market shares should not be attributed solely to a loss of competitiveness of Lithuanian exports, but the recent stabilisation of market shares suggests a gradual acceleration in the growth of Lithuanian exports as the above shocks subside.
The labour market continuous to be robust, and the number of people employed in Lithuania is currently the highest since the global financial crisis. The employment growth was influenced by a significant change in migration trends. In 2023, more foreigners and Lithuanians entered Lithuania than left. The positive migration balance outweighed the downward impact of natural population change, with the number of residents of Lithuania increasing by over 29,000 in 2023. As the labour force grew particularly rapidly, the unemployment rate slightly increased at the end of last year but, looking from the historical perspective, it is still low. But equally important is that, even as the number of people available for work has been growing rapidly, the job vacancy rate (the ratio of vacancies to total jobs) has not fallen significantly and remains close to historical highs. As Lithuania’s economy has not grown for almost two years, continued hiring, low and relatively stable unemployment rate and the still high vacancy rate reveal that tensions in the labour market remain. These factors, together with the willingness of companies to retain their existing workforce, have led to continued strong wage growth, while labour productivity has not increased. Such situation is unsustainable: if there is no recovery in economic growth and productivity, it will be increasingly difficult for companies to retain the existing wage growth without reviewing the number of employees.
Economic activity will remain sluggish in the short term, while a more marked recovery is expected only in the second half of this year. Economic activity will be mainly subdued by the sluggish export growth, which will be constrained by a modest increase in external demand and limited opportunities for re-exports. The unfavourable trends in the external environment should be outweighed by the gradually increasing domestic demand, particularly household consumption. Household consumption, which picked up at the end of last year, is expected to follow this trend, as real household income is projected to rise substantially, the labour market situation will remain favourable for the employed, and uncertainty about the future will diminish. Economic activity should be further boosted by investment, and its development will continue to be driven by increasing flows from European Union (EU) support funds. While investment is not expected to develop as vigorously as last year, investment volumes will remain at historically high levels. Taking it into account, Lithuania’s economy is projected to grow by 1.6% in 2024 and accelerate to 3.1% and 3.3% in 2025 and 2026 respectively. In this economic outlook, the risks surrounding Lithuania’s growth projections are tilted to the downside. Slower-than-expected economic growth could be determined by less favourable economic developments in major trading partners, a weaker recovery in household consumption, or a return to heightened global geopolitical tensions. On the other hand, if the absorption of EU support funds would be better than expected, it could result in more favourable economic developments in Lithuania than anticipated.
Inflationary pressures remain subdued following a fall in energy and other commodity prices. This, together with subdued domestic consumption, has led to a further decline in annual inflation, which remained unchanged at 1.1% in February compared with January, even after a significant weakening of the base effect. Core inflation, which excludes the more externally-driven energy and food prices, also declined, but remained significantly above headline inflation amid rapid labour cost increases. In February, core inflation exceeded headline inflation by more than four times. Prices of services, which are more driven by domestic factors than other groups, have risen at the fastest annual rate in recent months and were the main driver of headline inflation. While the unrest in the Red Sea poses a risk of upward pressure on commodity prices in the event of an increase in delivery costs, the price level of imported goods has not changed significantly, and markets continue to anticipate favourable developments in energy and commodity prices. Compared with previous projections, the high level of gas inventories, expectations of avoiding major supply bottlenecks during the cold season and the growing renewable electricity generation have led to a significant improvement in the assessment of the evolution of gas and electricity prices in the markets, resulting in a reduction of gas and electricity price assumptions by a third for this year, compared to the December projections. Taking this into account, average annual headline inflation is projected to fall to 1.6% this year and to stand at 2.4% in 2025–2026. As a result of the recovery in private consumption and the rise in labour costs at a slower albeit rapid pace, core inflation will outpace headline inflation this year. The average annual core inflation is projected to stand at 3.1% this year and at 2.4% in 2025–2026.
Table 1. Outlook for Lithuania’s economy
|
March 2024 projectiona |
December 2023 projection |
|||||||
|
2023 |
2024b |
2025b |
2026b |
2023b |
2024b |
2025b |
2026b |
|
|
Price and cost developments (annual percentage change) |
||||||||
|
Average annual HICP inflation |
8.7 |
1.6 |
2.4 |
2.4 |
8.8 |
2.5 |
2.5 |
2.4 |
|
Gross domestic product deflatorc |
7.1 |
2.4 |
3.1 |
3.0 |
7.7 |
2.9 |
2.9 |
2.9 |
|
Wages |
12.6 |
10.3 |
8.5 |
8.1 |
12.2 |
9.4 |
8.7 |
8.3 |
|
Import deflatorc |
-5.8 |
0.8 |
2.9 |
2.7 |
-5.5 |
0.0 |
2.9 |
2.5 |
|
Export deflatorc |
-0.2 |
1.4 |
3.0 |
2.8 |
0.0 |
1.1 |
2.9 |
2.5 |
|
Economic activity (constant prices; annual percentage change) |
||||||||
|
Gross domestic productc |
-0.3 |
1.6 |
3.1 |
3.3 |
-0.2 |
1.8 |
3.1 |
3.3 |
|
Private consumption expenditurec |
-1.1 |
3.0 |
3.7 |
3.7 |
-1.7 |
2.4 |
3.5 |
3.6 |
|
General government consumption expenditurec |
0.3 |
0.1 |
-0.5 |
0.0 |
0.3 |
0.2 |
0.0 |
0.0 |
|
Gross fixed capital formationc |
10.6 |
4.5 |
3.4 |
6.0 |
8.6 |
3.9 |
4.0 |
6.0 |
|
Exports of goods and servicesc |
-4.8 |
0.2 |
3.3 |
3.5 |
-5.3 |
0.5 |
3.2 |
3.4 |
|
Imports of goods and servicesc |
-6.6 |
1.3 |
3.9 |
4.7 |
-7.2 |
1.4 |
3.6 |
4.3 |
|
Labour market |
||||||||
|
Unemployment rate (annual average as a percentage of labour force) |
6.8 |
7.0 |
6.8 |
6.6 |
6.7 |
6.5 |
6.4 |
6.3 |
|
Employment (annual percentage change)d |
1.5 |
-0.2 |
-0.3 |
-0.3 |
1.0 |
-0.1 |
-0.5 |
-0.5 |
|
External sector (as a percentage of GDP) |
||||||||
|
Balance of goods and services |
4.0 |
3.6 |
3.2 |
2.5 |
4.0 |
4.0 |
3.7 |
3.1 |
|
Current account balance |
1.2b |
0.5 |
0.2 |
0.1 |
1.3 |
0.9 |
0.6 |
0.0 |
|
Current and capital account balance |
3.0b |
2.8 |
3.0 |
2.2 |
2.8 |
2.6 |
2.7 |
1.4 |
a The macroeconomic projections are based on external assumptions, constructed using information made available by 12 February 2024, and other data and information made available by 1 March 2024.
b Projection.
c Adjusted for seasonal and workday effects.
d National accounts data; employment in domestic concept.
1.International environment
The weak growth of global GDP is expected to continue this year, negatively affecting Lithuania’s economic outlook. According to the latest EC surveys, the expansion in global activity (excluding the EU) is estimated at 3.5% in 2023, with no further acceleration expected this year. Growth is projected to stand at 3.3%. A deceleration in the growth of developed economies (excluding the EU) from 2.2% in 2023 to 1.9% in 2024 also contribute to these projections. For example, in the US, GDP growth is anticipated to weaken this year due to a decline in fiscal support and a gradual slowdown in the labour market. However, the growth in developing economies is steady and is expected to stand at 4.1% this year. It is worth to pay attention to China where tensions in the real estate sector and low consumer confidence are restraining demand and hindering a more significant economic recovery. It should be noted that the weak developments in the world economy also adversely affect Lithuania’s growth outlook for 2024.
International trade is expected to accelerate this year, although significant barriers to its development persist. Early signs of recovery in the trade in goods were already observed at the end of 2023, and the trend (including international trade in services) is expected to continue in 2024. However, tighter monetary policy, persistently low real income of households and their cautiousness are expected to hamper the acceleration of international trade. Geopolitical tensions and the resulting increase in the number of barriers constraining international trade are also significant factors in reducing the volume of international trade.
As a result of reduction in supply-side bottlenecks, weak economic activity and tighter monetary policy, global inflation has been declining markedly recently. In 2023, average annual headline inflation and core inflation declined in both developed and developing economies. The EC expects the disinflation observed in the world economy to continue. These expectations are sustained by the fact that commodity markets have not yet shown any significant reaction to the recent tensions in the Red Sea. However, geopolitical risks from this and other factors remain, and if they materialise, higher commodity prices or tensions in cross-border supply chains could be expected, potentially increasing inflationary pressures again.
As a result of a strong development of private consumption, the US economy growth exceeded expectations last year, but it is projected to be weaker this year. The 2.5% growth in the US economy exceeded expectations last year, and the GDP development was revised upwards in the EC’s February projections for 2024. Nevertheless, the growth recorded in 2023 is not expected to be maintained, with a weaker economic development of 2.1%. This is likely to be strongly influenced by the gradual materialisation of the downward pressure from monetary policy and by the projected lower fiscal stimulus.
Facing both cyclical and structural challenges, China’s economic growth is expected to be weaker this year than in 2023. The EC’s February projections anticipate GDP growth slowing down to 4.6% this year. Economic developments have been adversely affected by falling real estate prices that have been going down over the past two years, shrinking housing investment and low household confidence. In a deteriorating international economic environment, net exports are not expected to significantly boost GDP development.
After the recession last year, the German economy is expected to start recovering gradually this year. The GDP growth of 0.3% projected by the EC is based on expectations of improved domestic consumption driven by an increase in real income. This is preconditioned by the unemployment rate remaining at historic lows, decreasing inflation (average annual consumer price inflation is expected to fall to 2.8% this year from 6.0% in 2023) and rising nominal wages. The growth expectations are linked to an increase in economic activity in the second half of 2024. This is because, according to the EC, the observed low levels of high-frequency indicators at the beginning of the year. Both the tighter fiscal policy and borrowing costs deterring private investment are likely to supress growth.
After subdued growth in 2023, Poland’s economy is projected to benefit from a strong recovery this year. The EC projections foresee that GDP growth will accelerate to 2.7% in 2024, primarily driven mainly by an increase in domestic demand. With average annual inflation declining from 10.9% in 2023 and with rapidly growing wages, the main engine of GDP growth will be a rise in household consumption this year. Government consumption is also expected to significantly contribute to GDP growth this year, as a result of new fiscal incentives. However, the slow recovery of economic activity in Poland’s export markets and the rising domestic demand mean that net export contribution to GDP growth in 2024 will be negative.
The economic trends in the neighbouring Baltic countries show variation, with both Latvia and Estonia projected to return to growth after last year’s GDP contraction. However, a more significant recovery is forecasted for Latvia. According to the EC estimation, Latvia’s economic growth is expected to reach 1.7% this year, up from 0.6% in 2023. Despite the projected slowdown in wage growth, these developments are expected to provide a positive stimulus to private consumption. EU investment is also expected to bolster GDP growth this year. In contrast, Estonia’s recovery is projected to be modest at 0.6%, affected by economic stagnation among its main trading partners. In addition, despite disinflation and a rise in nominal wages, a significant boost to private consumption is not expected due to tax increases.
2.Monetary policy of the Eurosystem
Over the last half-year, the Governing Council of the ECB maintained a restrictive monetary policy. After reaching 4% in September 2023, the key ECB interest rate (deposit facility) remained unchanged. The decision that interest rates should not be raised further was taken as a result of the observed decline in both headline and underlying inflation and the strong effect of increased interest rates on financing conditions. However, the base effect of the upward pressure related to energy prices led to a temporary increase in headline inflation at the turn of 2023–2024. According to the Governing Council, the key ECB interest rates are at a level that, if maintained for a sufficiently long period of time, will make a substantial contribution to the timely return of inflation to the target. The Governing Council also decided in December to reduce the volume of reinvestment under the pandemic emergency purchase programme in the second half of 2024 by €7.5 billion per month on average and to discontinue the reinvestments completely at the end of 2024.
Restrictive interest rates are expected to help gradually bring inflation in the euro area back to the 2% target in the medium term. Compared to October 2022, when inflation exceeded 10%, it was more than three times lower in February 2024, at 2.6% (see Chart 1). In the medium term, as the impact of higher interest rates materialises, the ECB’s projections foresee a return of inflation to the 2% target. Financial market participants believe that interest rates might start to decline slowly from June 2024. According to the pricing of financial markets, interest rates could be slightly over 2% in the long term, thus, no return to an environment of zero or negative interest rates is expected by financial market participants. The Governing Council of the ECB does not specify when it will start reducing interest rates, and it will take decisions on the appropriate level and duration of restrictions in the light of the data and circumstances available at the monetary policy meetings.
The key ECB interest rates remain high.
Chart 1. Actual data on interest rates, the euro area inflation and market expectations
Sources: ECB and Refinitiv.
Note: Data as of 7 March.
Bank lending rates stabilised in Lithuania and other euro area countries after the key ECB interest rates had reached their peak (see Chart 2). The rapid rise in interest rates on new loans in 2022–2023 was due to the increase in the variable component of interest rates on loans as a result of monetary policy decisions. However, this growth came to a halt in the second half of 2023 as the Governing Council of the ECB stopped raising interest rates. Although interest rates on new loans in Lithuania are still higher than the euro area average, this difference is more pronounced in the segment of new housing loans. This is explained by the fact that almost all housing loans (around 98%) in Lithuania are granted with a variable interest rate (usually 3, 6 or 12-month EURIBOR), while the euro area average is much lower (around 19%). The future dynamics of lending rates will depend on the monetary policy stance, the economic and financial situation of banks, and the competitive environment in the banking sector.
Financing conditions in the euro area and Lithuania stabilised at high levels.
Chart 2. Average interest rates on new MFI housing loans and loans to NFCs
Sources: ECB and Bank of Lithuania calculations.
Notes: 3-month moving average. Excluding revolving loans and overdrafts.
3.Real sector
Lithuania’s economic growth is projected to recover this year. This will be mainly driven by domestic demand. Wage growth will remain strong and average annual inflation, which is projected to fall to 1.6%, will lead to an increase in real income, paving the way for a recovery in private consumption. Taking this into account, Lithuania’s real GDP is projected to grow at the rate of 1.6% this year and 3.1% next year. The balance of risks is still on the downside, i.e. there are more risks that could adversely affect economic developments, such as the risk of persisting cautiousness of Lithuanian households, lower-than-anticipated growth in export markets, or the intensification of geopolitical conflicts.
The stagnation of Lithuania’s economy continued in the second half of last year.
Chart 3. Contributions to GDP growth by the production approach
Sources: State Data Agency and Bank of Lithuania calculations.
Economic developments in Lithuania have been mainly constrained by a significant decline in exports of goods and services. In the third quarter of 2023, Lithuanian exports contracted by 3.9% quarter on quarter, and by a further 0.2% in the fourth quarter. Throughout 2023, exports fell by 4.8%. The annual fall in exports in the second half of the year was predominantly due to a decline in the value of re-exports. This was driven by the extension of the list of dual-use goods banned from being transported by land through Lithuania as of July (see Chapter 5). Exports of goods of Lithuanian origin also put downward pressure on export developments in both the third and fourth quarters. These patterns were not so much affected by low foreign demand for Lithuanian goods, but rather by the decline in market shares due to the structure of Lithuania’s exports, poorer harvests, relatively high prices of natural gas and the operating restrictions imposed on one of the fertiliser producers (see Box 4). However, the projected recovery in foreign demand and market shares will improve the situation of exporters, but with the continuing contraction of re-exports, export volumes will growth minimally this year. Exports are projected to grow by 0.2% this year and 3.3% in 2025.
As real disposable income is rising, household consumption is showing signs of recovery. In the third quarter of 2023, household consumption fell by 0.5% quarter on quarter but rose by 2.1% in the fourth quarter. Despite this, household consumption fell by 1.1% in 2023 compared to 2022. Household consumption was dampened by real disposable income which had stagnated for almost two years and only started to rise in the second half of 2023. However, real wages, which are among the key components of real disposable income, started to increase slightly earlier, in the second quarter of 2023, amid a fall in inflation. Against the background of real disposable income dynamics, household consumption continued to be weak. Consumer spending only started to pick up in the last quarter of last year and was only 0.8% higher than a year ago. Such consumption dynamics were also influenced by the caution of people to consume amid the persisting uncertainty determined by the geopolitical situation, monetary policy and the impact of interest rate hikes on consumption expenditure. This is reflected in the results of the EC’s consumer survey on households’ perceptions of the suitability of the current moment for making major purchases: the perception in 2023 was significantly lower than the long-term average. In the second half of the year, the perception improved but was still below the long-term average. In the future, consumption patterns should be favourably affected by both improvement in the perception of economic security of households and a strong rise in real wages. This should give household even more room to increase consumption. In this context, consumption is projected to grow by 3.0% this year and by 3.7% in 2025.
The decrease in accumulated inventories and weak consumption had an adverse impact on the Lithuanian economy.
Chart 4. Contributions to GDP growth measured by the expenditure approach
Sources: State Data Agency and Bank of Lithuania calculations.
Investment growth continues to be strong as flows from EU support funds increase.
Chart 5. Investment development
Sources: State Data Agency and Bank of Lithuania calculations.
The COVID-19 pandemic that broke out in early 2020 brought a radical change to the society that lasted for several years. Many workers were forced to work from home and part of activities, especially contact-intensive ones, were completely suspended. The good news is that some of the tightest restrictions lasted for a relatively short time. Lithuania’s economy remained strong owing to the relatively low spread of the COVID-19 pandemic in Lithuania, economic support measures for businesses and households applied by the general government, and the flexibility of businesses in adapting to the new economic environment. All of this also led to the continued growth of household disposable income, while the financial situation did not deteriorate in 2020–2022.
Household disposable incomes that grew and the constrained consumption possibilities led to a significant increase in the amounts saved by households. Both in 2020 and 2021, the household savings ratio was 3 to 5 times above the historical average. On average, the household savings ratio was slightly more than 3% of their earned disposable income in 1995–2019, 14.5% in 2020 and 10.9% in 2021. It was only in 2022, when the economy faced new challenges again, that the ratio fell to 4.8%.
See here.
In 2020–2021, households in Lithuania accumulated €6.2 billion in excess savings, which constituted 15% of the total disposable income earned by households in 2022.
Chart A. Excess savings and their contributors
Sources: State Data Agency and Bank of Lithuania calculations.
Note: In the chart, the dynamics of household consumption are shown with an opposite sign as lower consumption below the pre-pandemic patterns pushes up excess savings of households.
Most of the excess savings were allocated by households to purchasing financial assets.
Chart B. Use of excess savings
Sources: State Data Agency and Bank of Lithuania calculations.
Note: Liquid financial assets are comprised of cash and deposits held by households. Non-financial assets consist of household investments, the estimate of which is made on the basis of yearly data and long-term gross capital formation ratio between the economy as a whole and households, and non-profit institutions rendering services to households. Other financial assets are calculated as the difference between excess savings and the sum of liquid financial assets, non-financial assets and loans. In the chart, loans are shown with the opposite sign as the flow of loans that is lower than before the pandemic demonstrates that households are borrowing less or are more active in repaying loans.
The majority of excess savings was accumulated by the wealthiest Lithuania’s households.
Chart C. Distribution of excess savings by deciles of net assets of households
Sources: SL, Eurostat (distributional accounts of households) and the Bank of Lithuania calculations.
Note: distribution of excess savings among households was calculated by multiplying the excess savings within the asset classes analysed by the composition of the portfolio of that asset class by household group.
Deposits grew steadily in all the analysed countries: Lithuania, Latvia, Estonia, and the euro area (see Chart A, right-hand panel). Moreover, deposits in Lithuania grew even faster than in other countries, almost doubling over the last decade.
Chart A. Total household deposits
Sources: Experimental Statistics on Distributional Wealth Account and authors’ calculations.
However, the allocation and distribution of increased deposits differs across countries. Chart B shows the distribution of all deposits between different cohorts in terms of their wealth in Lithuania. The share of households in the bottom 50% of the wealth distribution has been stable, while the share of households in the 60–80% and 80–90% of cohorts have decreased in recent years. In contrast, the share of deposits held by households in the top 10% of the wealth distribution increased, mainly during the COVID-19 pandemic. This suggests that most of the aggregate increase in deposits was concentrated among households at the top of the wealth distribution.
Most of the aggregate increase in deposits was concentrated among households at the top of the wealth distribution.
Chart B. Deposits decomposition over the wealth distribution in Lithuania
Sources: Experimental Statistics on Distributional Wealth Account and authors’ calculations.
Another way of capturing the unequal distribution of deposits between households is to look at the ratio between the bottom 50% and the top 10% of households. Chart C shows that the ratio and inequality in Lithuania were growing steadily and have only stabilised in recent years. A similar trend can be seen in Estonia, where the concentration of deposits at the top of the wealth distribution increased significantly during the pandemic years. However, the ratio decreased last year and returned to the level of 2016. A different situation is captured by looking at Latvia or the euro area in general. In both cases, the ratio decreased at the beginning of the period under review and has recently become stable.
An increase of deposit concentration at the top of the wealth distribution during the COVID-19 pandemic was recorded in Lithuania and Estonia, while the rest of the euro area kept it at the more stable dynamics.
Chart C. Total deposits ratio between the top 10% and the bottom 50% of households in the wealth distribution
Sources: Experimental Statistics on Distributional Wealth Account and authors’ calculations.
Homeowners gained more than non-owners (renters) and increased the value of their wealth as well as (housing wealth) inequality in the euro area.
Chart D. Housing wealth ratio between the top 10% and the bottom 50% of households in the wealth distribution
Sources: Experimental Statistics on Distributional Wealth Account and authors’ calculations.
As the previous results suggest heterogeneous dynamics across different types of assets, household cohorts and countries, the box is summarised by looking at the overall changes in wealth inequality across countries. Chart E shows the dynamics of wealth inequality across the countries analysed, based on the Gini index (the higher the index, the greater wealth inequality exists in a country or region). The results suggest that the overall wealth inequality in the euro area has been stable over the last decade. However, the situation is different in the Baltic countries. In Lithuania, wealth inequality increased steadily from 2016 to 2020 and remained at a similar level thereafter. It shows that the COVID-19 and the post-pandemic period had no impact on household wealth inequality in Lithuania. Slightly different dynamics are captured in Latvia, where wealth inequality increased slightly from 2016 to 2020, but much more in the last years. The opposite situation is foreseen in Estonia, where wealth inequality has been slowly decreasing over the last decade and the pandemic did not lead to a significant boom.
The overall wealth inequality has increased in Lithuania and Latvia, while it has not changed much in the rest of Europe over the last decade (see Chart E).
Chart E. Wealth inequality (Gini index)
Sources: Experimental Statistics on Distributional Wealth Account and authors’ calculations.
In summary, this box examines the dynamics and inequalities of household and total wealth over the last decade. The results show that wealth inequality in Lithuania has increased steadily over this period. The analysis of the main asset classes (housing wealth, deposits) suggests that changes in the value of real estate did not have a significant impact on the overall inequality in Lithuania. This is because most households in Lithuania own their homes and all of them benefited from the increase in property values. Moreover, there was not much investment in secondary or other property that could shift the overall concentration of property wealth towards the top of the distribution. Instead, most of the increase in wealth inequality was driven by changes in the concentration of deposits. As total deposits in Lithuania grew steadily, most of the growth was at the top of the wealth distribution. In other words, the top 10% of the wealthiest households increased their deposits much more than the bottom 50%. This has been one of the main reasons for the general increase in wealth inequality in Lithuania over the last decade.
4.Labour market
Despite the economic stagnation and persisting geopolitical risks, the labour market situation in Lithuania remained stable in 2023. However, unemployment is projected to grow slightly this year, but the labour market situation is not expected to deteriorate significantly. Last year, the unemployment in Lithuania averaged 6.8% and was 0.9 percentage points higher than in 2022 but remained similar to its pre-pandemic level. The increase in unemployment was mainly due to the growth in the population of working age and a rise in the labour force participation rate. According to the State Data Agency, seasonally adjusted unemployment was 7% in the last quarter of 2023, a quarter-on-quarter increase of 0.6 percentage points (see Chart 6). Due to the unemployment rate, which is still relatively low, and numerous job vacancies, labour market tension is not easing significantly. Because of labour shortages, the labour market situation remains favourable for workers. Looking at different data sources, no red flags are observed in the labour market either: unlike the unemployment rate officially published by the State Data Agency, registered unemployment decreased slightly in 2023 compared to 2022, and as shown by the latest data, stood at 9.3% in February this year, just 0.2 percentage points higher than a year ago. Unemployment in Lithuania is projected to grow to 7% this year and fall to 6.8% next year.
Unemployment rate increased in the last quarter of 2023, but historically was still relatively low.
Chart 6. Unemployment rate according to the State Data Agency, registered unemployment rate according to the Employment Service and labour market tensions
Sources: Employment Service, State Data Agency and Bank of Lithuania calculations.
Notes: The latest observations from the Employment Service are for February 2024. The State Data Agency data are seasonally adjusted.
Despite the pause in economic activity, the labour force and the employment numbers continue to grow in Lithuania. The labour force measure stood at 1.570 million in the last quarter of 2023 and was almost 4% higher than a year ago. Moreover, the resident participation rate in the labour market (in total by age group) went up by an average of 0.2 percentage points last year. The rise in participation rate is good news for the companies facing labour shortages and for the growth potential of the economy. The number of persons in employment continues to grow as resident participation in the labour market increases. At the end of the year, there were 1.454 million persons in employment, a year-on-year increase of 2.8%. The last time the employment rate was this high was in 2007 (see Chart 7). This employment development was significantly influenced by favourable migration trends and successful integration of war refugees into the Lithuanian labour market (see Box 3). The increase in employment is particularly pronounced in IT companies and educational establishments (18% and 16% per year, respectively), where, according to job vacancy statistics, there is a severe shortage of staff. The number of unemployed persons is also rising. Unemployed persons without a job for up to one month accounted for around 13% of the total number of the unemployed in Lithuania in the fourth quarter of 2023, the highest share since early 2020. However, it does not take long for recently unemployed persons to find a job: the share of long-term unemployed persons remains low compared to the total number of the unemployed.
The last time Lithuania recorded such a high labour force indicator was almost 20 years ago.
Chart 7. Development of main labour market indicators
Sources: State Data Agency and Bank of Lithuania calculations.
Note: Seasonally adjusted data.
In the last quarter of 2023, the job vacancy rate in Lithuania stood at 1.9% and was one of the highest since the start of the observation period. The supply of skilled labour continues to fall short of demand, and the labour market situation in Lithuania remains tight: at the end of the year, the country’s job vacancy rate was 0.2% higher than a year ago and remained unchanged quarter-on-quarter (adjusted for seasonal effects). Vacancy rates by activity were the highest in public administration and defence, transport and finance (see Chart 8). Tightness in the labour market enables employees to maintain strong bargaining power and reflects a labour market situation that is favourable for persons in employment.
At the end of the year, job vacancy rates remained high in most economic activities.
Chart 8. Job vacancy rates by economic activity in the last quarter of 2023
Source: State Data Agency.
Note: Names of economic activities are abbreviated.
Wage growth remained strong. In the last quarter of 2023, the gross average monthly wage grew by 11.1% quarter on quarter. Gross wages increased by around 13% in the public sector and 10% in the private sector. The country’s wage growth was observed in all economic activities: the highest wage growth was recorded in administration and service activities (18.8%), mining (16.6%), and water supply and waste management (15.6%), whereas the lowest wage growth was seen in real estate (5.9%), information and communication (6.8%), and finance (8.7%). The wage growth was determined by persisting tensions in the labour market, a 15% increase in the minimum wage from 1 January 2023, and an increase in the basic salary for public servants and employees of budgetary institutions. It should be noted that the wage growth gap across economic activities was observed last year. Previously, wages used to grow in double digits in most economic activities, whereas now the difference between the activities with highest and the lowest wage growth is more than threefold. The opportunity to raise wages is affected by the difference in the level of labour shortages and different situations across sectors. For example, wage growth is slower in real estate and manufacturing as these activities are facing problems and their activity is subdued. A slight slowdown in wage growth is expected this year. Annual wage growth is projected at 10.3% in 2024 and 8.5% in 2025.
Against the backdrop of a fall in inflation and strong nominal wage growth, real gross wages that did not grow in 2022 returned to their previous levels. After a break that lasted for more than a year, real gross wages resumed growth in the second quarter of 2023. With the labour market showing resilience and inflation still declining, the annual growth accelerated to over 8% at the end of 2023 (see Chart 9). This growth was almost sufficient to bring real wages back to their 2021 level. The persistent tensions in the labour market allow employees to negotiate faster wage increases in order to recover the loss of purchasing power following the sharp rise in inflation. With the labour market showing resilience and inflation continuing to decline, nominal wage growth will continue to outpace inflation in 2024, which should further increase household purchasing power.
The purchasing power of households recovered, reflected by increases in real gross wages for three consecutive quarters.
Chart 9. Contributions to real gross wage developments
Sources: State Data Agency and Bank of Lithuania calculations.
The number of foreigners living in Lithuania has become record high: for the first time in the country’s history, the threshold of 200,000 has been crossed. Based on the data of the Migration Department, at the beginning of February this year, nearly 225,000 foreigners were legally residing in Lithuania, which accounts for around 8% of the total Lithuanian population. The largest number of valid temporary residence permits were held by Ukrainians (86,000), belarusians (62,000) and russians (16,000). In the context of russia’s continuing military aggression in Ukraine, citizens of the latter comprise the largest share of foreigners living in Lithuania. Around 53,000, or 60%, of all Ukrainians who have arrived are considered war refugees and have been granted residence permits on the basis of temporary protection. However, not all foreigners with valid residence permits stayed in Lithuania: some went abroad or returned to their previous country of stay. According to the State Data Agency’s provisional migration statistics for 2023, the majority (around 8,000 or 77%) of all Ukrainian immigrants went to Ukraine. This shows that in 2023 a relatively high proportion of Ukrainian war refugees lived in Lithuania temporarily. A much lower share of immigrants went back to russia and belarus, i.e. around a third and a tenth.
In 2023 the number of immigrants in Lithuania was almost a quarter lower than in 2022, due to the significant decrease in the number of arriving Ukrainians.
Chart A. Foreign national immigrants
Sources: State Data Agency and Bank of Lithuania calculations.
* Data for 2023 are provisional.
Smaller flows of immigration of foreign nationals and larger emigration flows determined a less favourable overall net migration balance but were still significantly better than before the COVID-19 pandemic. Lithuania’s record high migration balance (72,000) in 2022 fell by almost 40% (see Chart B). In 2023, there were around 45,000 more people who arrived in Lithuania than left it. As in 2022, the overall migration balance was significantly boosted by foreigners, with around 39,000 more foreign nationals coming to the country than leaving it. However, compared to 2022, the net migration rate of foreigners was almost half as low in 2023. This is mainly due to a significant decrease in the gap between Ukrainian immigrants and emigrants (2,400), partly offset by the arrival of nationals from other countries (see Chart B). In contrast to 2022, Ukrainian nationals who came and left last year accounted for only a small share (around 6%) of the total difference between all foreign national immigrants and emigrants. Net migration of Lithuanian citizens was positive for the fourth consecutive year (over 6,000 persons) and remained almost unchanged over the year.
In 2023, the decline in overall net migration in the country was due to the significantly lower migration rate of foreign nationals, mainly driven by smaller-scale immigration of Ukrainians and a significant increase in emigration of Ukrainian citizens.
Chart B. Overall migration balance by nationality (left-hand panel) and foreign migration balance by nationality (right-hand panel)
Sources: State Data Agency and Bank of Lithuania calculations.
* Data for 2023 are provisional.
For the first time since the start of data publication, the number of permanent residents in Lithuania grew for two consecutive years. However, due to relatively less positive migration patterns, the permanent population growth slowed down last year, compared to 2022. Two years ago the population grew by as much as 1.8%, a record-high increase since the start of data publication. According to provisional data, the number of permanent residents in Lithuania in early 2024 was around 2.89 million, the highest in the past eight years. Compared to 2022, the annual population growth slowed down to 1%. The main contributing factor to this development was the narrowing of the gap between foreign immigrants and emigrants (see Chart C). However, even the contraction in the migration balance was more than enough to offset the negative natural population change. In 2023, around 16,000 more people died than were born in Lithuania. Although the gap was narrower than in 2022, the natural population change indicator has not yet returned to its pre-pandemic level.
Last year the increase of the population indicator was 1.8 times slower than in 2022.
Chart C. Contributions to the dynamics of the number of permanent residents in Lithuania in 2003–2023
Sources: State Data Agency and Bank of Lithuania calculations.
* Data for 2023 are provisional.
The changing Ukrainian diaspora is adjusting the picture of Lithuania’s labour force indicator. According to the data of the Employment Service, at the end of 2023 the number of Ukrainian citizens employed under employment contracts since the start of russia’s war against Ukraine and self-employed Ukrainians in Lithuania stood at around 34,000 and was significantly higher than a year ago. As the number of employed persons increases, that of unemployed Ukrainians registering with the Employment Service is slowly decreasing (see Chart D). Almost two out of three working-age Ukrainians who came to Lithuania got employed. Men constitute the majority of all Ukrainians working in Lithuania under employment contracts. This pattern contrasts with that observed at the beginning of 2022, when men from Ukraine accounted for a smaller share of all employed persons (see Chart D). This is also reflected in Lithuania’s general indicators. In 2023, compared to 2022, when Lithuania faced a strong inflow of women fleeing russia’s war against Ukraine, the overall annual growth of the female labour force in Lithuania slowed down, and the male labour force picked up last year after a halt in 2022.
The change in the structure of war refugees over the past two years contributes to changes in the Lithuanian labour force by gender.
Chart D. Core indicators of employment of Ukrainians (left-hand panel) and labour force in Lithuania by gender (right-hand panel)
Sources: Employment Service, Sodra, STI, State Data Agency and Bank of Lithuania calculations.
The successful integration of Ukrainians into the Lithuanian labour market continues: the share of employed Ukrainians is growing, while the share of unemployed Ukrainians is decreasing.
Chart E. Share of employed, unemployed, economically active Ukrainians and belarusians in Lithuania (left-hand panel) and indicators of integration of Ukrainians into the Lithuanian labour market (right-hand panel)
Sources: Employment Service, Sodra, STI, State Data Agency and Bank of Lithuania calculations.
Note: ES means the Employment Service.
Wages and salaries rose for employed Ukrainians across all economic activities, however, the share of Ukrainians with the lowest earnings (up to €1,500) is the highest.
Chart F. Average negotiated wages of Ukrainians (left-hand panel) and the share of employed Ukrainians by the amount of wages (right-hand panel) (data as of Q4 2023)
Sources: Employment Service, Sodra, State Data Agency and Bank of Lithuania calculations.
Note: Names of economic activities are abbreviated. Average negotiated wages of Ukrainians, by type of operating activities of the employer, are disclosed in employers’ reports on foreigners working in Lithuania.
Citizens of belarus, the second largest group of foreigners coming to work in Lithuania, contribute to employment growth in higher value-added sectors and are most rarely employed in low-skilled activities. In total, around 48,000 immigrants from belarus work in Lithuania under employment contracts, only a tenth of them are women. According to the STI, around 2,400 more belarusians (two times less than Ukrainians) are self-employed. 500 job seekers are registered with the Employment Service. In the fourth quarter of 2023, employed and unemployed belarusians accounted for 3.2% of Lithuania’s labour force (see Chart E). Their participation in the labour market is higher than that of war refugees from Ukraine, with labour force activity rates of 81% and 70% respectively. The activity rate of belarusians is close to the overall labour force participation rate in Lithuania. The majority (88%) of belarusians have a medium-skilled job (they mainly work as drivers and construction workers), and there are quite many of them (11%) in high-skilled jobs (mainly IT and communication systems and physical sciences and engineering) (see Chart G). Those employed in low-skilled activities make up a mere 1%. This share is much lower than that of Ukrainians (18%) (see Chart G). By complementing the skills of the local population and by developing innovations, the new highly skilled professionals who come can boost Lithuania’s labour productivity and contribute to economic growth. In addition, from an economic point of view, even low-skilled immigrants can generate benefits: by coming to work in areas where there is a labour shortage problem, they reduce the constraints of business development. For the immigration policy to have a positive impact on the country’s economy and labour market indicators, it has to be targeted, provide the necessary conditions for social integration and meet the country’s national, demographic and economic needs.
The largest share of belarusians is employed in medium-skilled jobs, while the lowest share is in low-skilled activities.
Chart G. Belarusians (top panel) and Ukrainians (bottom panel) employed, by main subgroups of occupations (data as of Q4 2023)
Sources: Employment Service, Sodra, State Data Agency and Bank of Lithuania calculations.
Notes: Names of economic activities are abbreviated; the main subgroups of occupations are prepared according to the Lithuanian Classification of Occupations.
5.External sector
Lithuania’s export and import volumes continued to contract in the second half of 2023. Real exports decreased by 3.9% in the third quarter of 2023 compared to the previous quarter, and by 0.2% in the fourth quarter (see Chart 10). Re-exports, which had been declining since the beginning of the year, contributed mostly to the decline in exports over the past half of the year. A contraction in exports of goods of Lithuanian origin also weighed negatively on exports. Only an increase in the exports of services prevented exports from dropping further.
Struggling industry and the decline in re-exports reduced the demand for imported goods and services. Real imports contracted by 3% in the third quarter of 2023 and by 1.5% in the fourth quarter of 2023 compared to the previous quarter. A drop in imports of intermediate goods was the main contributor to the decrease in imports in the last half of the year. A fall in imports of capital goods and vehicles (mainly due to the decline in the volume of re-exports of such merchandise) also negatively affected imports.
Following the contraction in the first half of last year, the external sector continued to decline in the second half of the year.
Chart 10. Quarter-on-quarter developments in real exports and imports of goods and services
Sources: State Data Agency and Bank of Lithuania calculations.
Even though the export market share and exports of Lithuanian origin declined, the global market share in the second half of 2023 was still larger than before the shocks of the past few years, i.e. higher than in 2019. It is also noteworthy that the most recent monthly data points to the stabilisation of the global market share. In recent months, the market share of timber, furniture and articles of wood has stabilised, while those of machinery and equipment and metals have further increased. Thus, the expected recovery of the export market share of Lithuanian-origin goods and the gradual pick-up of foreign demand in 2024 suggest that exports of Lithuanian origin will slowly recover in the next years.
Exports of Lithuanian origin continued to contract, but as export market shares of Lithuanian-origin goods stabilise and recover, these exports are expected to gradually pick up, along with foreign demand.
Chart 11. Development and drivers of change in real exports of Lithuanian origin
Sources: ECB, State Data Agency and Bank of Lithuania calculations.
Note: LTEX means exports of Lithuanian origin.
Re-exports also shrank in the second half of 2023 (see Chart 12). The decline of re-exports in the last half year can mainly be attributed to tightened requirements for exports of dual-use goods and vehicles to third countries. These requirements led to the contraction of exports of such goods and the loss of market shares in the Commonwealth of Independent States. In the past, one of the key factors contributing to the growth of re-exports was Lithuania’s convenient geographical location which spurred the transit movement of goods through the country. However, the attractiveness of Lithuania as a transit country for re-exports has considerably declined as a result of tightening requirements for trade with third countries. It is therefore likely that, at least in the short term and until the trade restrictions are lifted, the stronger development of re-exports will be somewhat limited.
Exports of services continued to increase gradually in the second half of 2023, although a slowdown was observed in the fourth quarter (see Chart 12). In the third quarter of 2023, growth in exports of services was mainly driven by increases in exports of transport, financial and insurance services. The growth in exports of financial and insurance services can be mainly attributed to an increase in the volume of financial services provided by Revolut Bank UAB abroad. Exports of transport services were boosted by continued growth in exports of road, air and other transport services (logistics centres, auxiliary transport services, etc.). However, exports of transport services continued to be negatively affected by exports of rail transport services, with rail freight turnover in tonne-kilometre in the third quarter of 2023 still more than halved, compared to 2021, when export restrictions on belarusian potash fertilisers was not yet in force. Looking ahead, downside risks to exports of transport services, and in particular road transport services, remain unchanged: rising labour costs, mobility package requirements and slowing international trade. On the other hand, the rapid expansion of the export market shares and exports of other non-transport services (mainly financial and insurance services) in 2023 provides confidence regarding the dynamics of exports of these services next year. It is therefore likely that exports of services will also grow in 2024, against the backdrop of recovery in foreign demand. However, the growth will be mainly driven by the rise in exports of other non-transport transport services.
Re-exports contracted significantly due to stricter trade requirements with third countries, and there is little prospect of a significant recovery in the short term. Meanwhile, exports of services continued to grow.
Chart 12. Development and drivers of real re-exports (left-hand panel) and real exports of services (right-hand panel)
Sources: State Data Agency, Bank of Lithuania and Bank of Lithuania calculations
Note: REEX means re-exports. Exports of services in the fourth quarter of 2023 are calculated on the basis of the Bank of Lithuania’s monthly data.
Further developments in the external sector are closely linked to the economic development of Lithuania’s main trade partners. Elevated uncertainty as well as high interest rates will constrain foreign demand in 2024. The growth of foreign demand in 2024 is projected to be less than half of its historical average and is expected to accelerate only in the second half of the year. Although a moderate recovery in foreign demand and market shares are expected to lead to a gradual recovery in exports of Lithuanian-origin goods, the tightened trade with third countries is likely to lead to a weak development in re-exports in 2024. Exports of services are expected to continue rising, but the strongest growth can be expected in segments of services which still make up a relatively small share in the export structure of services. Thus, while the growth rate of exports of goods and services is likely to be positive, it will still be well below the historical average. Due to this, the Bank of Lithuania projects that exports of goods and services will grow by 0.2% in 2024. A gradual quarterly recovery in exports and domestic demand will boost the demand for the imports of goods. However, the subdued development of re-exports is projected to hamper any stronger growth of imports. For these reasons, the Bank of Lithuania projects that imports will grow by 1.3% in 2024.
Box 4. How has Lithuania’s global export market share changed in recent years due to competitiveness and structural factors?
The russian military invasion of Ukraine in 2022 and the subsequent energy price shock, the significant rise in economic uncertainty and the deterioration in the economic situation of the main trade partners led to a decline in exports of Lithuanian origin from the second half of 2022. In 2023, the nominal exports of goods of Lithuanian origin, excluding mineral products, were more than a tenth lower than in 2022 (see Chart A). While part of this contraction was determined by a foreign demand factor, which is beyond the control of Lithuanian exporters, the contraction in the export market share had the strongest negative impact. Historically, the development of the export market share had a strong positive impact on exports, thus, the decrease in the export market share, which started in late 2022 and intensified sharply in 2023, poses a question: are Lithuanian exporters losing competitiveness in foreign markets? To answer this question, the box analyses the developments in exports market shares of Lithuanian-origin goods, excluding mineral products, and assesses whether the negative trends of the past few years pose a risk to the future competitiveness of exports.
While historically the development of export market shares has had a strong positive impact on exports, export market shares have been steadily declining since 2022.
Chart A. Developments of and contributions to exports of goods of Lithuanian origin, excluding mineral products
Sources: Eurostat, U.S. Census Bureau, HM Revenue & Customs, State Data Agency and Bank of Lithuania calculations.
Note: LTEX means exports of Lithuanian origin, excluding mineral products. Information for 2023 includes data for January to November 2023.
While a decline in competitiveness of Lithuania’s exports can indeed be linked to a decrease in the export market share, the aggregate global export market share may also decline if Lithuania’s exports are targeted at a slowly expanding market of a certain commodity or at a geographic market. In such a case, a declining export market share would not be a reflection of a weaker competitiveness of Lithuanian exporters, but of the result of structural changes, i.e. lower demand for a particular commodity and/or weaker foreign demand in a particular market.
As shown by the decomposition of the export market share into structural and competitiveness effects (see Chart B), the competitiveness effect had a profound positive impact on the development of the export market share in 2020–2021. The positive impetus of this effect on the market share development can mainly be attributed to the disrupted global supply chains in 2020–2021. This enabled Lithuanian exporters to take market shares from foreign exporters (mainly from Asia). Another factor that contributed to this positive effect was the strong growth of reagent exports during the COVID-19 pandemic, which made it possible for Lithuanian exporters to become an important participant in the vaccine market.
In 2021, positive structural product and market effects also contributed to the rapid development of the export market share. The positive product effect in this period can mainly be linked to increased demand for products in which Lithuania has traditionally specialised: timber, furniture and articles of wood, fertilisers and plastics. The positive market effect is explained by Lithuania’s strong orientation towards the markets of Northern Europe and the Baltic States where foreign demand grew rapidly during that period.
The export market share growth was strong due to both structural and other factors in 2020–2021.
Chart B. Developments of and contributions to the global market share of exports of goods of Lithuanian origin, excluding mineral products
Sources: Eurostat, U.S. Census Bureau, HM Revenue & Customs, State Data Agency and Bank of Lithuania calculations.
Note: information for 2023 covers the period from January to November 2023.
However, a decline in the market share was already noticeable in 2022–2023. A more detailed breakdown of competitiveness effects and structural effects into commodity groups and markets provides a better understanding of why, after a significant gain in the export market share between 2020 and 2021, the market share started to decline rapidly in 2022–2023 (see Chart C). In 2022, the structural market effect turned negative and can mainly be explained by the fact that the growth of foreign demand in the markets of the US, the UK, the Western and Southern EU was stronger than in the markets of Northern Europe and the Baltics, towards which Lithuanian exports are more oriented. In 2023, the market effect was close to zero.
As for the structural product effect, it was still positive in 2022 but became negative in 2023 and had the most negative impact on the development of the export market share. As in 2021, the positive structural product effect in 2022 was driven by a strong demand for timber, furniture and articles of wood, chemicals and plastics, as well as agricultural and food products. However, in 2023, the slowdown in the real estate sector in the main trading partners (due to interest rate hikes) led to a significant drop in demand for timber, furniture and articles of wood and thus negative product effect in this product segment. The negative product effect in the chemicals and plastics in 2023 can be explained by a substantial fall in prices and demand for these products.
Market share losses in 2023 can mainly be attributed to the loss of market shares for chemicals and plastics, agricultural products, food, timber, furniture and articles of wood.
Chart C. Developments of the structural market effect (left-hand panel), developments of the product effect (panel in the middle) and developments of the competitiveness effect (right-hand panel)
Sources: Eurostat, U.S. Census Bureau, HM Revenue & Customs, State Data Agency and Bank of Lithuania calculations.
Note: Information for 2023 covers the period from January to November 2023.
In summary, the analysis has shown that the loss of market shares in 2022–2023 cannot be attributed solely to a loss of competitiveness of Lithuania’s exports. While the decline in the competitiveness effect accounts for more than half of the reduction in the export market share in 2022, structural factors dominate in 2023. It should also be noted that the pure contraction in price competitiveness in 2022–2023 can only be observed in the nitrogen fertilisers’ commodity group, while other market share contraction factors dominate in other product groups. In view of the above, there is hardly any reason to believe that the loss of export market shares would be prolonged due to lower price competitiveness. This is confirmed by the latest monthly data (see Chart D) which demonstrates that the market share of Lithuanian-origin exports is stabilising, and even growing in the second half of 2023 when excluding exports of mineral products and chemicals. This growth can be attributed to the stabilisation and a slight increase in the export market share for timber, furniture and articles of wood in recent months, as well as the gradual growth of the export market share for metals and machinery and equipment from mid-2023. The recovery in market shares and their growth suggest that not only the growing foreign demand but also the recovery of export market shares (due to structural and competitiveness factors) will contribute to the recovery of Lithuanian-origin exports in 2024.
The latest monthly data indicate a stabilisation in the market shares of Lithuanian-origin exports. This suggests that Lithuania’s global export market share will be gradually recovered in 2024, which will have a positive impetus for the development of exports.
Chart D. Market share developments of Lithuanian-origin exports and individual product groups
Sources: Eurostat, U.S. Census Bureau, HM Revenue & Customs, State Data Agency and Bank of Lithuania calculations.
Note: LTEX means exports of Lithuanian origin.
6.Prices
Against the backdrop of a fall in energy and other commodity prices, inflationary pressures remain weak. This, coupled with subdued domestic consumption, led to the fall in annual inflation that lasted until January, even with the significantly reduced base effect. According to provisional data, annual inflation stood at 1.1% in February, unchanged from January (see Chart 13). The decline in annual inflation in recent months was mainly driven by slower annual increases in food commodity prices. Upon the fading of the upward effect of external factors, services, the development of which is driven by domestic factors more than of other groups, became the main determinant of inflation since December last year. While the disturbances in the Red Sea pose a risk of upward pressure on commodity prices in the event of an increase in the cost of delivery, the price level of imported goods is not changing significantly, and favourable developments in energy and commodity prices are expected in the markets. Against this background, average annual inflation is projected at 1.6% this year and 2.4% in 2025.
Annual inflation continues to fall, with rising service prices being the main driver.
Chart 13. HICP inflation and its contributions
Sources: State Data Agency and Bank of Lithuania calculations.
Note: Inflation data for February are provisional.
The growth in food prices is declining, with some groups of goods becoming cheaper.
Chart 14. Price developments for all food and main groups of food products
Sources: State Data Agency and Bank of Lithuania calculations.
Energy prices keep exerting downward pressure on inflation, albeit with decreasing effect.
Chart 15. Impact of energy on annual headline inflation
Sources: State Data Agency and Bank of Lithuania calculations.
The growth of unit labour costs is slightly weaker, yet still rapid.
Chart 16. Development of wages, labour productivity and unit labour costs
Sources: State Data Agency and Bank of Lithuania calculations.
7.Financing of the economy
Due to the rise in the cost of borrowing, financial liabilities of Lithuanian households and firms grew at a slower pace in 2023 than in 2022, and the volume of net financial assets followed the upward trend. In the third quarter of 2023, financial liabilities of Lithuanian residents grew by 3.1% in six months, to €16.8 billion. However, the volume of growth in deposits and unlisted shares assets was higher, resulting in a 2.8% increase in the net financial assets of residents over the six months (amounting to €57.7 billion). The liabilities of non-financial undertakings augmented by 4.1% over the six months (in 2022 the liability portfolio grew at an average semi-annual rate of 10%), to stand at €68.5 billion. This increase was supported by a more active offering of bonds and borrowing from other financial institutions. Total corporate financial assets, in particular unlisted shares, grew more than total corporate liabilities during the half-year (€3 billion and €2.7 billion respectively), and as a result, corporate net financial assets increased by 2.5% (amounted to €15 billion in the third quarter of 2023). The economy is financed in a sustainable manner, and the slowdown in the growth of financial liabilities is likely driven by the need to manage the risks associated with higher borrowing costs.
The growth of credit portfolio of MFIs in Lithuania is quite strong, albeit slower.
Chart 17. Annual growth of the portfolio of MFI loans granted to Lithuanian non-financial corporations and households
Source: Bank of Lithuania.
The growth rate of the household loan portfolio is the slowest since the pandemic period but remains relatively elevated at the euro area level, notably due to the robust consumer credit. The portfolio of MFI loans granted to households grew at an annual rate of 6.9% in the fourth quarter of 2023 (0.2% in the euro area), i.e., almost twice as slow as in the third quarter of 2022, when it peaked (see Chart 17). As borrowing costs stabilised at high levels and the number of purchase transactions fell back to 2016 levels, housing lending continued to moderate: in the fourth quarter of 2023, 4.4 thousand new housing loans with the value of €396 million were granted (down by a quarter and a fifth respectively, compared to the previous year). On the other hand, as the number of consumer loans granted to Lithuanian residents increased slightly over the year, the borrowing volumes grew by one-fifth as well. Historically strong growth in consumer credit has been driven by loans granted on exceptionally favourable terms by one market participant. In spite of this, the gap between the ratio of household loan portfolio to GDP and the long-term trend remains steadily negative (–2 percentage points), therefore, no excess borrowing has been observed. As shown by results of the Bank lending survey, credit standards for households tightened further at the end of 2023, and the demand for loans ceased to grow in the consumer credit segment which used to be more buoyant up till then. Nevertheless, the further development of lending to residents will be positively affected by the resumption of real labour income growth resulting from the slowdown in inflation and by the expectations formed in the financial market for the approaching start of monetary policy easing. The optimism of the market is illustrated by the cost of interbank borrowing, which decreased somewhat from the peak in autumn 2023, and by interest rates on new housing loans that stopped rising.
While the provision of new credit was dampened by higher borrowing costs and weaker credit demand, the corporate segment is showing a rebound trend and active consumer lending partially compensates for a more pronounced decline in the provision of housing loans.
Chart 18. Quarterly flows of MFI loans to Lithuanian NFCs and households
Source: Bank of Lithuania.
Corporate borrowing both from credit institutions and from other sources continued to decrease in the second half of 2023, but there are signs of stabilisation. The portfolio of loans granted by MFIs to non-financial corporations grew at an annual rate of 4.3% in the fourth quarter of 2023 (0.1% in the euro area), i.e., 15 percentage points slower than in the third quarter of 2022, when the peak of growth was recorded (see Chart 17). On the other hand, the growth rate of the loan portfolio stabilised in the second half of 2023, amid the recovery of new bank credit flows (see Chart 18). In addition, with the activation of funding with bonds and loans from other financial institutions, the annual growth rate (9.5%) of companies’ total credit portfolio (which includes all sources of credit) stopped going down. In the fourth quarter of 2023, 6.2 thousand new bank loans with the value of €827 million were granted to firms (down by a sixth and up by a quarter respectively, compared to the previous year). As more banks reported on the deteriorating financial condition of the transportation sector, credit institutions started to slightly limit the funding of this activity: compared to the first half of the year, transport companies were granted loans with the value lower by 16% (the total amount was €275 million). On the other hand, as the expectations of manufacturing companies improved after the extremely sluggish period, they borrowed €310 million in the second half of 2023 (11% more than in the first half of the year).
While the share of companies reporting financial difficulties remains the highest since the 2008 crisis, only the hospitality sector, which has been materially affected by the pandemic, currently faces significant problems with repaying loans on time. The share of non-performing loans in the portfolio of the latter companies is 11.4% (in the portfolio of all companies, this indicator stands at 1.5% and is at a historical low even among such pro-cyclical sectors as construction or real estate operations). With interest rates for new business loans ceasing to rise and banks expecting that loan demand should stop shrinking in the near term, cautious optimism is establishing in the corporate segment. Looking ahead, the financial outlook and credit to companies should be positively affected by the rising household purchasing power, increased investment and the situation of foreign trade partners, which is likely to improve.
8.General government finance
The relatively strong growth in the general government revenue and the weaker growth in expenditure conditioned that the financial situation of the general government was slightly better in 2023 than in 2022. The data for the third quarter show that the general government revenue exceeded the expenditure both in terms of nominal value and the annual growth rate, which favourably affected the general government balance-to-GDP ratio, which (measured by a 4-quarter moving sum) stood at -1.1% of GDP. The latest monthly data from the central government suggest that the general government revenue continued to increase rapidly while expenditure decreased, which resulted in a further reduction of the general government deficit in the fourth quarter of 2023, i.e. it was around 0.1 percentage points narrower than in the fourth quarter of 2022.
The growth rate of the general government expenditure went down in 2023. In the third quarter of 2023, the general government expenditure grew by only 9% over the year, which is half as much as in the second quarter and 12 percentage points less than in the first quarter. The main contributor to the slowdown in the growth of total expenditure was the growth of social benefits (see Chart 19), up by only by 1.7% over the year, which was weaker than in the previous four quarters. This slowdown in the growth of social benefits was due to the additional effect of indexation of pensions which ceased to accelerate growth from June 2023, and to social payments for family support which were 23% lower year on year. Subsidies paid that were 78% lower than those paid in the same quarter a year ago were the second major factor that slowed down the growth of expenditure. Given that these factors (and in particular the subsidies that were considerably lower due to the stoppage of subsidies to businesses and households for higher electricity prices, which used to be the main driver of expenditure growth in the fourth quarter of 2022) also weighed on the general government expenditure in the last quarter of 2023, the rate of growth of total expenditure can be assumed to have been even weaker than in the third quarter.
The slowdown in the growth of the general government expenditure was conditioned by the weaker growth in social benefits and lower subsidies.
Chart 19. Annual growth of the general government expenditure and their contributions
Sources: State Data Agency and Bank of Lithuania calculations.
The growth of the general government revenue is supported by the sizeable rise in the wage bill, rapidly increasing collected corporate income tax and growing nominal consumption. In the third quarter of 2023, the growth of the general government revenue was 11% (5 percentage points) lower than in the second quarter of 2023. For the second consecutive quarter, revenues collected from direct taxes, which were around 19% more abundant than a year ago, had the greatest positive influence on the growth of the general government revenue (see Chart 20). The strong annual growth in personal income tax revenue is supported by a strong labour market. In the first to third quarters of 2023, the wage bill increased by 13% on average. Going into more detail, in the period referred to, the annual growth of the headcount in the economy amounted to 1.7% on average, therefore, it can be stated that the underlying factor that led to the growth of the wage bill was the rapid increase in wages (on average, they increased by around 11% year-on-year in the first to third quarters of 2023). It should be noted that changes in the wage bill are also usually explained by the changes in social contributions, but they increased by only 1.2% in the third quarter, which is significantly less than in previous quarters of 2023 and less than the wage bill. This discrepancy was due to significantly lower (about 75% lower compared to the same period a year ago) inflow of premiums for publicly insured persons in the third quarter of 2023. It should be noted that such a big reduction of contributions, although not a trend, has been recorded before, too, and the amounts of these contributions that normally flow in the last quarter are much bigger. Higher revenues from corporate income tax, which were a quarter higher in the first three quarters of 2023 compared to respective period in 2022, materially contributed to the growth of direct taxes. The increased profits from finance and insurance as well as information and communication activities provided the grounds for such a strong acceleration in the growth of revenue from this tax. It is noteworthy that the income from indirect taxes positively contributed, albeit to a lesser extent each quarter of 2023, to the growth of the total general government revenue. This was influenced by the nominal household consumption expenditure, the increase of which has been slowing down, and the slower rate of price growth (see Box 5). According to the monthly data from the STI and Sodra, it can be assumed that the growth of the general government revenue accelerated in the last quarter of 2023 as the growth rate of direct and indirect taxes was significantly stronger than in the third quarter of 2023 (4 and 5 percentage points, respectively). The slowdown in the growth rate of the general government expenditure and the rapid growth rate of the general government revenue provides grounds for believing that in 2023, the general government balance-to-GDP ratio was better than in previous years.
The general government revenue growth was supported by the rapid increase in the income from direct taxes.
Chart 20. Annual growth of the general government revenue and their contributions
Sources: State Data Agency and Bank of Lithuania calculations.
The general government debt-to-GDP ratio decreased to 37.4% in the third quarter of 2023 and was likely to go up to around 38.2% in the last quarter. In the third quarter of 2023, the decrease in the general government debt-to-GDP ratio by 0.7% was due not only to the nominal GDP growth but also to the nominal value of the debt which was around €235 million lower, compared to the second quarter of 2023. According to the latest borrowing and debt repayment statistics, the Government’s net borrowing in December amounted to €600 million, which conditioned net borrowing to be 1.1 billion higher in the last quarter, compared to the third quarter of 2023. Considering this and the historical link between the change in net borrowing and the general government debt developments, it can be assumed that the debt-to-GDP ratio went up to 38.2% in the last quarter. Looking at near-term prospects, it should be noted that in February 2024, the Government issued debt securities for the amount of €1.5 billion. As a result of this forward borrowing, the debt-to-GDP ratio is likely to increase in the first half of the year but expected to decline again in the second half of the year as the debt obligations maturing this year are met.
The influence of prices on VAT revenues can be distinguished by approximating the tax base with household consumption expenditure which can be broken down into volume and price components according to the national accounts statistics.
Δ (VAT revenue) = ε ⨯ (Δ (volume of household consumption expenditure) + Δ (household consumption expenditure deflator)) + measures + u (1)
Compared to previous years, the contribution of the price factor on the general government revenues collected from VAT especially strengthened in 2021–2023.
Chart A. Developments of and changes to VAT revenue
ss
Sources: STI, Ministry of Finance and Bank of Lithuania calculations.
* The estimate of the annual flow of income from VAT is based on STI information publicly available in the Summary of taxes and other contributions to budgets as of 31 December 2023. The estimate of the annual flow of income from VAT in 2024 is based on the information on the planned amount of revenue to be collected from VAT, publicly available in the Annex to the explanatory notes to the draft budget for 2024. The Bank of Lithuania’s March 2024 projections for the respective indicators in 2023 and 2024 were used to measure the impact of household consumption expenditure at constant prices and the deflator.
Abbreviations
EC European Commission
ECB European Central Bank
EU European Union
EURIBOR Euro Interbank Offered Rate
Eurostat Statistical Office of the European Union
Eurosystem European Central Bank and central banks in the euro area
GDP gross domestic product
IT information technology
MFI monetary financial institution
STI State Tax Inspectorate
UK United Kingdom
US United States of America
VAT value added tax
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© Lietuvos bankas Gedimino pr. 6, LT-01103 Vilnius, The Lithuanian Economic Review analyses the developments of the real sector, prices, public finance and credit in Lithuania, as well as the projected development of the domestic economy. The material presented in this review is the result of statistical data analysis, modelling and expert assessment. The review is prepared by the Bank of Lithuania. The cut-off date for the data used in the publication is 1 March 2024. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. ISSN 2029-8471 (online) |