19 December 2024
The global economy is gradually
strengthening, but with uneven development trends. The services sector is growing markedly against the background of
lower price increases, recovery in personal income and improving financial
situation of households. It is the services sector that is the driving force
behind global economic growth this year. The manufacturing sector is doing less
well. After a brief pick-up in the first half of the year, as enterprises
sought to replenish stocks of products that had fallen significantly in the
previous year, the manufacturing sector has recently been declining again. It
is largely flat in China and falling in the US and the euro area. Continued
geopolitical tensions, the impact of previously tightened monetary policy and a
more non-durable goods and services oriented demand are contributing factors.
This affects global trade and economies that are more oriented towards foreign
demand, including the Lithuanian economy. The import outlook for Lithuania’s
trading partners has been downgraded in recent quarters, although it is still expected
that after stagnating this year imports of euro area countries will start
rising next year, while imports of other countries will continue growing
steadily.
Economic activity has also picked
up in Lithuania. Recently, growth has been
observed in a number of economic activities. Just as in previous years, there
has been a marked increase in the added value generated by business-oriented
services. Information and communication, professional, scientific,
administrative, support and other related services are growing more than the
economy as a whole. In the first three quarters of this year, these services
accounted for around 40% of total economic growth.
Household-oriented services,
such as trade, arts, entertainment, recreation and other activities, are also
gaining ground as domestic demand gradually recovers. However, private
consumption is rising at a rather limited pace, significantly slower than
household income. This is likely due to continued geopolitical uncertainty,
previously tightened monetary policy and other factors that further constrain
the acquisition of consumer durables. This year’s increase in private
consumption is mainly driven by stronger demand for non-durable goods and
services. Not only services-related activities, but also the manufacturing
sector has picked up over the year. As stocks of manufactured products were
low, manufacturing benefited from a slight improvement in the economic
situation abroad and a higher number of orders. Industrial production has grown
in most of the main manufacturing branches compared to its level a year ago.
However, enterprises do not exploit their production potential, with production
capacity utilisation levels still below those before the shocks of the last few
years and below the long-term average.
The labour market situation is
fairly stable. The total number of persons
employed is decreasing moderately,
but this decline in the number of employees is not widespread. The main driver
of the decrease is the transport activity. Excluding the latter, the total
number of the employed remains stable. The unemployment rate has not changed
much either. It is currently higher than it was before the period of sluggish
economic development which started in 2022, but it is stabilising in most
social groups, except for the youngest population. Youth unemployment continues
to rise markedly. With the unemployment rate higher than two years ago, the
duration of unemployment is increasing. The number of long-term unemployed has
also risen recently. Higher unemployment, still positive net international
migration and continued uncertainty about the outlook for international
economic developments exert less pressure on wages. This is particularly
noticeable in the private sector, where the pace of wage growth has been
declining for several years. Nevertheless, wages are rising significantly.
Labour costs are growing more than total nominal value added, which means that
persons employed receive an increasing share of value added. This puts upward
pressure on prices and undermines the competitiveness of less innovative
enterprises.
Economic activity is projected to
strengthen gradually. The international
economic environment is expected to have a more favourable impact on economic
development than this year. Imports of trading partners are expected to
increase more than recently, which will boost demand for goods and services
exported by Lithuania. Domestic demand is also projected to further boost
growth. With income rising above consumption expenditure for quite some time
now, there is considerable scope for households to accelerate consumption, even
in the presence of somewhat slower projected income growth. The recovery of
investment should also contribute to a more significant increase in economic
activity. Increasing flows from the European Union support funds, the waning
effect of previously tightened monetary policy and growing domestic and foreign
demand are projected to have an upward impact on investment. Corporate profits,
which have been rising over the last few years, are also likely to have a
favourable impact.
,
Real gross domestic product (GDP) is projected to grow by 3.1% next year,
following an increase of 2.4% this year. In the following years, the pace of
economic development will remain similar, though it will still be lower than
the growth rates prevailing in the previous decade, i.e. before the shocks of
the last few years. Growth will be constrained by limited scope for more
efficient use of labour resources, poor demographics and less buoyant trading
partner markets than in the previous decade.
Price dynamics remain sluggish. The overall level of consumer prices has remained fairly stable for
almost two years. In the first eleven months of this year, it was only 0.8%
higher than a year ago. The uneven recovery of various economies, only
temporary improvement in the global manufacturing sector as well as the fall in
energy and food commodity prices on international markets have a dampening
effect on energy, processed and unprocessed food and other consumer prices.
Domestic demand does not appear to be exerting any significant pressure on
prices either. Overall price increases are mainly stimulated by rising labour
costs. Their impact is particularly pronounced in the development of the most
labour cost-sensitive prices, i.e. prices for services. The latter continue to
increase quite substantially. Prices for services are rising faster than before
the shocks of the last few years (i.e. faster than until 2019), partly because
labour costs are now also on the rise to a greater extent. It is unlikely that
the rise in prices for services is at least somewhat more significantly driven
by the marked increase in gross costs which took place in the past (several
years ago).
In other words, there is no evidence of lagged transmission of previous surge
in gross costs. Over the projected period, labour costs will continue to be among
the main drivers of headline inflation, as wages are expected to continue to
rise significantly. The gradually improving international economic environment,
growing prices of some energy commodities (e.g. gas), and increases in indirect
taxes will also push up headline inflation.
After staying at 0.8% this year, average annual headline inflation is projected
to increase to 2.3% next year and 2.6% in 2026-2027.
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December 2024 projectiona
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September 2024 projection
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|
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2024b
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2025b
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2026b
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2027b
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2024b
|
2025b
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2026b
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2027b
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Price and cost developments (annual percentage change)
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Average
annual HICP inflation
|
0.8
|
2.3
|
2.6
|
2.6
|
1.0
|
2.5
|
2.6
|
–
|
|
GDP
deflatorc
|
3.8
|
3.3
|
3.1
|
3.1
|
3.4
|
3.1
|
3.1
|
–
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Wages
|
10.3
|
8.7
|
8.1
|
7.5
|
9.8
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8.5
|
8.1
|
–
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Import
deflatorc
|
-0.9
|
2.0
|
2.3
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2.1
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-0.8
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1.8
|
2.3
|
–
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Export
deflatorc
|
1.2
|
2.2
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2.4
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2.2
|
1.4
|
1.7
|
2.4
|
–
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Economic activity (constant prices; annual percentage change)
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|
|
GDPc
|
2.4
|
3.1
|
3.1
|
3.0
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2.2
|
3.1
|
3.3
|
–
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Private consumption expenditurec
|
3.0
|
3.7
|
3.7
|
3.7
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3.6
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3.7
|
3.7
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–
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General government consumption expenditurec
|
0.4
|
0.0
|
0.0
|
0.0
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0.2
|
0.0
|
0.0
|
–
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Gross fixed capital formationc
|
-2.3
|
6.1
|
4.8
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4.4
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-3.6
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6.6
|
5.1
|
–
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Exports of goods and servicesc
|
2.2
|
2.5
|
3.6
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3.7
|
1.2
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3.1
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3.8
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–
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Imports of goods and servicesc
|
0.5
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3.5
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4.4
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4.4
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0.0
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4.5
|
4.5
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–
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Labour market
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|
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Unemployment
rate (annual average as a percentage of labour force)
|
7.4
|
7.1
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6.9
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6.7
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7.4
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7.1
|
6.9
|
–
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Employment
(annual percentage change)d
|
1.8
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-0.1
|
-0.3
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-0.3
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1.6
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-0.4
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-0.3
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–
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External sector (percentage of GDP)
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|
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Balance
of goods and services
|
6.4
|
5.8
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5.4
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4.9
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6.1
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5.0
|
4.6
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–
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Current
account balance
|
3.2
|
3.0
|
2.4
|
1.9
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3.2
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1.6
|
1.1
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–
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Current
and capital account balance
|
4.3
|
5.2
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4.2
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2.6
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5.1
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3.7
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2.7
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–
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aThe macroeconomic projections are based on assumptions about the
international environment, constructed using information made available by 20
November 2024, and other data and information made available by 27 November
2024.
b Projection.
c Adjusted for seasonal and workday
effects.
dNational
accounts data; employment in domestic concept.
.
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Gedimino pr. 6, LT-01103 Vilnius
www.lb.lt
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ISSN 2783-557X (online)
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