Lithuania’s economic development and outlook

12 March 2025

Uncertainty, which is at its peak in recent decades, weights on global economic growth. The global economy entered 2025 with a high degree of uncertainty about the future. Hard-to-predict decisions on trade policy, government finances and geopolitical conflicts have raised various uncertainty indicators to record highs. Such uncertainty about the future of economic development affects the decisions of both businesses and households. A particularly high reversal of expectations is observed in the US. While at the end of last year businesses were still very optimistic about the US economy, the latest Purchasing Managers’ Index data recorded in February show considerably more pessimistic sentiment toward further economic development. The euro area also shows little optimism. Economic growth in the euro area, although slowly recovering, will be noticeably below its long-term rate this year. These trends in the euro area’s economic development are strongly influenced by difficulties faced by Germany, the euro area’s largest economy. Recent estimations suggest that a more significant recovery of this economy could not be expected until next year. This is mainly due to the structural challenges currently faced by Germany’s industry and diminished competitiveness in global markets. Concerns over the economic development of the US and the difficulties of the euro area economy will put constraints on the growth of external demand for goods and services exported by Lithuania. It will remain at a lower level throughout the projection horizon compared to the decade before the COVID-19 pandemic.

Lithuania’s economy remains resilient. In the second half of last year, the quarterly growth of Lithuania’s economy approached its long-term growth rate, mainly owning to the increasing recovery of household consumption. It was 4.9% higher in the last quarter of 2024 than a year ago and significantly above the average for the last decade. Key contributors to this trend in household consumption are the recovery in consumption of non-durable goods and the continued growth in consumption of services. The development of investment, which is another factor of domestic demand, was less favourable. After demonstrating rapid growth between 2021 and 2023, investment declined last year. However, its volume, as compared to Lithuania’s gross domestic product (GDP), remains at historically high levels. The main constraint on investment development in recent quarters has been the decline in investment in capital goods. Subdued investment did not hamper the development of exports. Although the drop in re-exports and exports of mineral products has led to a decline in total exports, exports of non-mineral products of Lithuanian origin, which generate higher added value, have been increasing significantly for half-year. This is particularly the case for exports of chemical products and plastics, however exports of engineering, wood and furniture products also showed an upward trend.

Lithuania’s economic growth is projected to further strengthen this year, but there are significant risks that could lead to a markedly different economic development. The economy grew by 2.7% last year and is expected to grow by 2.9% this year and at a similar pace in the coming years. Both domestic demand and exports of goods and services will contribute to such economic development. The development of exports will be largely influenced by a gradual increase in foreign demand for Lithuanian goods and services. Growing export volumes and the increasing utilisation of production capacity should stimulate a recovery in private sector investment. The development of investment will also benefit from the waning effect of previously tightened monetary policy and flows of European Union (EU) support funds. Against the backdrop of growing domestic economy, the demand for labour will continue to be robust, and wage growth will remain buoyant. With incomes rising more than consumption expenditure for quite some time now, there is considerable scope for households to increase consumption. However, the current global geopolitical situation is highly volatile and trade restrictions in the US and the EU could have an adverse effect on the Lithuanian economy, the extent of which will depend on trade policy decisions. Decisions of Lithuania’s Government may also have a profound impact on the country’s economic development. The choice of measures, for example, designed to ensure adequate funding of Lithuania’s defence needs or implementation of the reform of 2^nd pillar pension funds, can have both positive and negative effects on the country’s economic development in the short and medium term.