Lithuania’s economic development and outlook
22 December 2025
In 2025, the global economy slowed
down only marginally. There was greater
uncertainty, and yet customs duties on US imports did not increase as much as
feared. The situation in the labour markets of various countries was relatively
favourable, which boosted domestic demand, especially in service-related
economic activities. In the first half of the year, economic activity was
significantly boosted by stockpiling ahead of the expected customs tariff hike,
which stimulated industrial production and international trade. In 2025, global
international trade even accelerated. The surge in import growth was
particularly prominent in the euro area and other European Union (EU)
countries, the United Kingdom (UK), Japan, as well as in some other Asian
countries. In the first nine months of this year, manufacturing output in the
euro area was 1.5% higher than a year ago, marking the first increase in this
sector in the euro area after a two-year hiatus. In the second half of 2025,
however, global economic activity began to weaken. Global international trade
and industrial production growth in some countries (e.g., the US, the euro
area, the UK) lost momentum[1]
.
The slowdown in activity had been expected earlier, and the economic growth and
international trade projections for most countries and regions for this year
and the coming year have not been revised downwards, but rather upwards, as it
appears that the earlier projections were too cautious. The growth prospects of
some countries are also being improved by the projected increase in defence
spending.
[1] Based on quarterly growth data, adjusted for seasonal and
working day effects.
Higher inflation and uncertainty in
the international environment are leading to slower economic growth in
Lithuania. The average change in real gross
domestic product (GDP) per quarter in the first three quarters of 2025 accounted
for a mere 0.27%, which was about four times lower than in 2024[2]
. One of the factors slowing
down growth was private consumption. In the first three quarters of 2025, the change
in retail trade per quarter was almost two times lower and the change in total
private consumption per quarter was almost five times lower than in 2024[3]
. Rising inflation and
household sentiment, which had been deteriorating for some time, had the
greatest adverse impact on demand for semi-durable goods[4]
. Manufacturing was also
growing more slowly. The quarterly change in both its volume and generated value
added in the first three quarters of 2025 was about six times lower than in
2024[5]
. Manufacturing grew
significantly only in the first quarter, when it responded to higher demand for
production ahead of the potential increase in customs tariffs. Later, as demand
began to subside, manufacturing started to decline. This was also further
exacerbated by a temporary reduction in the output volumes of one of the
fertiliser manufacturers. After particularly rapid growth in previous years,
some service activities also slowed down, namely information and communication,
professional, scientific, administrative, and related activities. This was
apparently influenced by both the more sluggish economic environment in
Lithuania and the slowdown in growth towards more moderate rates.
[2] The data used for the analysis are adjusted for seasonal and
working day effects.
[3] The data used for the analysis are adjusted for seasonal and
working day effects.
[4] These goods include clothing, footwear, household textiles,
small household appliances, and other semi-durable goods.
[5] The data used for the analysis are adjusted for seasonal and
working day effects.
With weaker economic growth, labour
income is also rising more slowly, though the situation for the employed
remains favourable. The average quarterly
change in wages in the first three quarters of 2025 was about one-fifth lower
than in 2024[6]
.
The slowdown in wage growth is observed in most economic activities. This is
likely due not only to greater uncertainty in the international environment,
but also due to the already significant increase in the share of value added allocated
to employees. However, wages are rising faster than the overall price level,
hence the real income of households is increasing. The continuing rise in real
wages is significantly affected by the high demand for workers, and although
there are fewer undertakings whose activities are limited by labour shortages
than a few years ago, the share of such undertakings does not fall below the
long-term average. The issue of labour shortages is compounded by changing
demographic trends. Net international migration remains positive, however it is
significantly lower than it was in 2022-2023 (this is particularly true for the
international migration of non-Lithuanian nationals). For this reason, the population
of Lithuania, which grew significantly over 2022-2024, remains virtually
unchanged this year. This has an impact on labour market indicators, with the
indicators of the labour force and the number of employed persons essentially
no longer growing.
[6] The data used for the analysis are adjusted for seasonal
effects.
In the coming years, economic
fluctuations will be significantly affected by the reforms being implemented,
rising general government expenditure, and the unstable international environment. Economic growth in 2026 should be accelerated by the possibility of
withdrawing funds from second-pillar pension accumulation funds (SPPAF), which
will increase the disposable funds of the population[7]
. More than this year, economic
activity will be driven by a significant increase in certain general government
expenditure, specifically investments related to defence needs and other
investments. Real GDP is expected to grow by 3.2% next year, after growing by 2.5%
this year. Unlike the drivers mentioned above, foreign demand, which grew this
year partly due to increased stockpiling ahead of the entry into force of
higher customs tariffs, is expected to grow less next year, thus limiting
export growth. The tradable sector of the economy will be constrained by the
already increased customs tariffs, although their impact will be relatively
small[8]
.
The changes in taxation adopted in June this year will also have a restricting
effect on economic activity, however their impact will also be relatively small[9]
. Economic growth in 2027 is
projected to slow down as the positive effect of funds previously withdrawn
from the SPPAF wanes, since these funds will only have a temporary effect on
household consumption. Economic growth is expected to return to a more normal
trajectory in subsequent years, with any further withdrawals from the SPPAF
having only a limited impact. Real GDP growth is projected to reach 2.3% and 3.0%
in 2027 and 2028, respectively.
[7] Macroeconomic projections assume that there will be a somewhat
more intense withdrawal from the SPPAF at the beginning of 2026, with 20% of
their participants leaving the SPPAF at that time. It is assumed that the
majority of these participants (90%) will be financially constrained individuals
who tend to spend the withdrawn funds for consumption immediately. Such
withdrawals will increase not only private consumption but also other economic
indicators, such as private sector investment, wages, the number of employed
persons, and the general consumer price level. Under these circumstances, the
withdrawal of one-fifth of participants from the SPPAF would result in 2026 in
a real GDP growth rate that would be approximately 0.6 percentage points higher
and an inflation rate that would be 0.1 percentage points higher than if there
were no changes to the second-pillar pension system. However, the positive
impact on economic growth will be short-lived, as the withdrawal of funds from
the SPPAF will only temporarily increase household disposable funds. By 2027,
most economic indicators are expected to be negatively affected. This would
result in real GDP growth in 2027 being approximately 0.7 percentage points
lower than if the pension system reform in question were not implemented. The
impact on inflation in 2027 could be around -0.1 percentage points. It is also
assumed that, at the end of the two-year period when the funds from the SPPAF
can be withdrawn on more favourable terms, a further 20% of SPPAF participants
will leave the SPPAF. It is assumed that the majority of these participants
(90%) will be less financially constrained individuals, and their marginal
propensity to consume will be approximately half their normal propensity to
consume. Such a withdrawal of funds would have a lesser impact on economic
development than the expected withdrawal of funds in 2026. It is estimated that
the withdrawal of all the mentioned participants from the SPPAF would result in
a real GDP growth rate that would be approximately 0.2 percentage points higher
and an inflation rate that would still be 0.1 percentage points lower in 2028
than if there were no changes to the second-pillar pension system.
[8] In the macroeconomic projections, it is assumed that US
customs tariffs will remain at the same level throughout the projected period
as they were at the time when the projections were prepared. It is assumed that
there will be no retaliatory measures taken by the EU. Under this scenario, the
change in trade policy could reduce Lithuania’s real GDP growth by a total of
0.4 percentage points over 2025-2028, while the impact on inflation is likely
to be close to neutral. Lithuania’s economy will be affected to a greater
degree not through trade with the US, but through trade with EU countries, as
the US market is not the main market for Lithuanian exporters (only about 5% of
Lithuania’s total exports are directed to the US). The US market is much more
important for the larger EU countries, so they will be affected more, which
will also have an adverse impact on Lithuanian producers.
[9] Due to the upcoming changes in taxation adopted in June 2025,
Lithuania’s real GDP growth rate over the projected period (2026-2028) is
likely to be 0.2 percentage points lower than it would have been without such
taxation-related changes. The calculation only takes into account the impact of
future changes in taxation and does not consider where and when tax revenues
will be used. Economic activity will be mostly constrained by increases in
direct taxes, particularly personal income tax. Due to the upcoming changes in
taxation adopted in June this year, the overall consumer price level is likely
to increase by 0.5%. It will be pushed up mainly by increasing indirect taxes.
Inflation, which rose at the
beginning of the year, has not declined significantly. The rise in food commodity prices in the second half of last year
and at the beginning of this year is still affecting consumer prices. Food
prices stand out as one of the fastest rising prices in the entire consumer
basket. The situation is, admittedly, further exacerbated by indirect taxes,
which have been increased more than in the previous years and account for
almost a quarter of the increase in food, including alcoholic beverages and
tobacco, prices. Indirect taxes on energy products have also been raised more
than in the previous years. This is partly why the latter products are slightly
more expensive this year, despite a rapid decline in oil prices. All indirect
tax increases add approximately 0.8 percentage points to inflation this year[10]
, accounting for about a
quarter of it. Rising labour costs also have a significant impact on inflation.
Wage pressure has eased, however wages are still rising faster than labour
productivity, thereby contributing to the upward effect on prices.
[10] Based on data of the harmonised index of consumer prices at
constant tax rates.
Outlook for Lithuania’s economy
|
December 2025 projectiona |
September 2025 projection |
|||||||
|
2025b |
2026b |
2027b |
2028b |
2025b |
2026b |
2027b |
2028b |
|
|
Price and cost developments (annual percentage change) |
||||||||
|
Average annual HICP inflatione |
3.5 |
3.1 |
2.6 |
2.5 |
3.5 |
3.1 |
2.6 |
- |
|
GDP deflatorc |
3.9 |
3.4 |
2.9 |
3.1 |
3.6 |
3.3 |
2.9 |
- |
|
Wages |
8.4 |
9.1 |
6.9 |
7.5 |
8.2 |
8.9 |
6.9 |
- |
|
Import deflatorc |
-0.5 |
1.5 |
2.1 |
2.0 |
-0.5 |
1.3 |
2.3 |
- |
|
Export deflatorc |
0.2 |
2.2 |
2.1 |
2.1 |
0.1 |
1.4 |
2.3 |
- |
|
Economic activity (constant prices; annual percentage change) |
||||||||
|
GDPc |
2.5 |
3.2 |
2.3 |
3.0 |
2.7 |
3.2 |
2.3 |
- |
|
Private consumption expenditurec |
2.0 |
5.0 |
0.4 |
4.8 |
2.2 |
6.0 |
0.8 |
- |
|
General government consumption expenditurec |
1.3 |
0.3 |
0.1 |
0.1 |
0.9 |
0.1 |
0.1 |
- |
|
Gross fixed capital formationc |
6.5 |
11.5 |
3.6 |
4.1 |
5.7 |
5.4 |
3.4 |
- |
|
Exports of goods and servicesc |
4.3 |
2.3 |
3.3 |
3.3 |
3.8 |
2.0 |
3.4 |
- |
|
Imports of goods and servicesc |
7.9 |
6.2 |
2.2 |
4.5 |
5.2 |
3.4 |
2.5 |
- |
|
Labour market |
||||||||
|
Unemployment rate (annual average as a percentage of labour force) |
7.0 |
6.6 |
6.5 |
6.5 |
7.1 |
6.6 |
6.5 |
- |
|
Employment (%, annual percentage change)d |
0.0 |
0.2 |
-0.2 |
-0.3 |
-0.2 |
0.1 |
-0.3 |
- |
|
External sector (percentage of GDP) |
||||||||
|
Balance of goods and services |
3.5 |
1.4 |
2.2 |
1.4 |
4.6 |
3.7 |
4.3 |
- |
|
Current account balance |
0.1 |
-1.8 |
-1.2 |
-2.1 |
1.4 |
0.4 |
0.8 |
- |
|
Current and capital account balance |
1.6 |
0.4 |
-0.1 |
-1.4 |
3.6 |
2.2 |
1.6 |
- |
a The macroeconomic projections are based on external assumptions, constructed using information made available by 26 November 2025, and other data and information made available by 1 December 2025.
b Projection.
c Adjusted for seasonal and workday effects.
d National accounts data; employment in domestic concept.
e Harmonised Index of Consumer Prices.
Inflation will remain at an elevated level for some time. In the coming years, indirect taxes will be increased to a greater degree than recently. Both the previously planned changes in taxation and those adopted in June this year will increase inflation by a total of approximately 1.1 percentage points next year. In addition, the general increase in prices is also likely to be compounded by the withdrawal of funds from the SPPAF, which will stimulate economic activity and hence demand-driven inflation. However, it is expected that there will also be factors suppressing inflation in the coming years. With the supply of food commodities returning to normal levels, the prices for these commodities are not expected to increase in the near future. Food producer prices are already starting to fall, which should also have a suppressing effect on consumer food prices. It is now projected that inflation will reach 3.5% in 2025 and 3.1% in 2026. In the subsequent years, with indirect taxes rising less, the price-increasing effect of withdrawals from the SPPAF disappearing, and less significant increases in labour costs, inflation is projected to decline. It is projected to account for 2.6% and 2.5% in 2027-2028, respectively.
|
© Lietuvos bankas Gedimino pr. 6, LT-01103 Vilnius Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. ISSN ISSN 2783-557X (online) |