Lithuania’s economic development and outlook

12 June 2025

Continued uncertainty and increasing customs tariffs in international trade affect global economic development. Ongoing trade policy disputes continue to have a significant impact on uncertainty indicators around the world. Although these indicators have fallen from historical highs, they remain significantly higher than their levels prior to the onset of trade policy disputes. US decisions on customs tariffs taken since March have resulted in a more than threefold increase (from 3.5% to almost 13%) in effective customs tariffs on goods and services imported into the world’s largest economy. Such an escalation in tariffs should make goods imported into the US more expensive for both residents and businesses, thereby increasing production costs for businesses and reducing the purchasing power of households due to higher prices, and limiting international trade. Less favourable economic development in the US would also dampen economic developments in its trading partners, which could slow down even further if countries took significant retaliation measures. However, at the beginning of this year, businesses actively increased inventories in an attempt to mitigate the potential impact of customs tariffs. This boosted international trade and production in a large number of countries, and the Purchasing Managers’ Index showed fairly strong economic growth. However, this is not likely to last, as the growth in many of the world’s economies will begin to slow down. These developments in the global economy and among Lithuania’s main trading partners will lead to a marked decline in demand for goods and services produced in Lithuania, both this year and next year. And although demand should grow throughout the projection horizon, the growth rate will remain significantly slower than the long-term average.

Trade policy disputes and the prevailing turmoil have not yet slowed down Lithuania’s economic growth. In the first quarter of this year, it grew by 3.0% year on year, which is only slightly slower than in the second half of last year. A number of economic activities contributed to economic growth, with value added created by manufacturing, information and communication activities growing particularly strongly. Although the upturn in manufacturing activity in the first quarter of this year was impacted by businesses’ attempts to mitigate the potential impact of customs tariffs, manufacturing also maintained its competitiveness, supporting sustained growth above the long-term trend observed before the COVID-19 pandemic. This is particularly true for higher value-added manufacturing sectors, such as the manufacture of computers and optical products as well as chemical products. Favourable manufacturing trends also contributed to the rebound in the volume of exports of goods of Lithuanian origin. Information and communication activities also continued their strong growth trend that has been observed for several years. As a result, the share of value added created by information and communication activities in Lithuania’s economy has almost doubled over the past decade, gradually transforming the whole of Lithuania’s economy towards the creation of higher value added. This transformation is also driven by a major increase in investment following the COVID-19 pandemic: the ratio of investment to gross domestic product (GDP) at constant prices has been close to 25% over the past years, compared to around 20% previously. A brief spike in inflation, which dampened both household purchasing power and consumption growth, prevented Lithuania’s economy from growing even more rapidly.

Compared to the beginning of the year, price pressures have eased. This was largely due to lower energy prices, which were significantly affected by heightened uncertainty and risks related to global economic growth and potential decline in demand. Given this development in prices for energy resources, annual inflation in Lithuania declined from 3.7% in March to 3% in May. Prices for services, which have been rising at an annual rate of nearly 6% for more than a year, continued to account for the largest share of inflation. Their price growth continued to be driven by wages, which were still rising at a relatively fast, albeit slower, pace. However, it should be noted that the impact of food prices, including prices for alcoholic beverages and tobacco, on annual inflation has also increased significantly and represents only a slightly smaller share than prices of services. Due to higher food commodity prices and increased excise duties on alcoholic beverages and tobacco, the annual growth rate of food prices, including prices for alcoholic beverages and tobacco, has increased significantly since the end of last year and reached 5.1% in May. Due to weaker price pressures caused by the drop in prices for energy resources since the beginning of the year, the appreciation of the euro, and the projected slower growth in prices for imported goods, the overall price level will not change substantially in the coming months of this year, and average annual inflation will amount to 3.3% in 2025. With wages rising at a slower yet still strong pace, services will remain the main driver of inflation, although rising food prices, including prices for alcoholic beverages and tobacco, will also make a significant contribution. In 2026 and 2027, with falling energy resource prices and prices for food commodities rising more slowly, average annual inflation will decline to 2.5% and 2.6%, respectively.