Lithuania’s economic development and outlook

17 September 2024

The global economy is recovering, but with uneven development trends. With prices rising less and real income slowly recovering, the services sector has strengthened in many regions of the world. It is benefiting not only from the favourable situation in the labour markets of various countries, which has contributed to a fairly significant rise in wages, but also from the continuing increase in demand for the services whose availability was limited during the pandemic. In the euro area and in some other regions, the expansion of the services sector accounts for the bulk of overall economic growth. The manufacturing sector is underperforming. The start of a decrease in stocks accumulated by enterprises and the growing purchasing power of the population led to a recovery of the manufacturing sector in the first half of 2024, however this recovery was not observed everywhere. The industry in the US and China picked up, but the euro area industry continued shrinking. In the euro area countries, industrial output has been decreasing since the beginning of 2023 and is currently only at the level observed in 2019. Surveys of purchasing managers suggest that the situation in the manufacturing sector in many regions of the world will be challenging in the near future due to a significant increase in the number of various restrictions on international trade and continued considerable geopolitical uncertainty. In both the euro area and other regions, manufacturing is not expected to expand in the short term.

Economic activity has also picked up in Lithuania. The services sector is the main driving force behind overall economic growth. For some considerable time now, information and communication activity has been growing to a significantly greater degree than the economy as a whole. Upon attracting an increasing number of workers over the past few years, it accounted for about a quarter of total economic growth in the first half of this year. During this period, the added value generated by information and communication activity was almost one tenth higher than a year ago. Other services, namely, professional, scientific, administrative and support services, which play an increasingly important role in economic development, also contribute rather significantly to overall economic development. Domestic trade is also expanding, with real household income rising markedly. Private consumption is now much higher than a year ago. Private consumption as a whole is actually influenced not only by higher wages and other income, but also by population growth. Real private consumption per capita has still not returned to the historical peak observed in early 2022, before the period of higher inflation rates set in. To a lesser extent than many other activities, manufacturing is nevertheless bolstering economic activity this year, although the sector shrank significantly last year. Stocks of manufactured goods have decreased considerably, while orders for industrial goods have increased. In all major manufacturing industries, the situation has improved, or at least is not substantially worse than a year ago.

Economic activity is projected to grow slowly. In the second half of 2024, Lithuania’s economic development will be slower than in the first half of the year due to the weaker performance of foreign economies and is expected to pick up next year. Economic growth will be stimulated more by rising foreign demand. With prices rising less, real income of the population increasing and financing conditions improving, some economies (more specifically in the euro area) are expected to grow faster. As a result, demand for goods and services exported from Lithuania will rise more rapidly. The amount of European Union (EU) support funds available for investment is expected to increase next year. This will outstrip the rise in nominal gross domestic product (GDP), which will have a significant impact on economic development. The use of EU support funds, more robust domestic and foreign demand should lead to higher investment by both the public and private sectors, outweighing the temporary decline in investment observed in 2024. The favourable situation in the labour market should also contribute to economic growth, allowing for a rise in real personal income and consumption. Real GDP is projected to increase by 3.1% next year after growing by 2.2% this year. Faster economic development is also expected in the following years. In 2026, real GDP is projected to grow by 3.3%. However, it should be noted that the economic growth rate will not be as rapid as observed before the shocks that occurred in recent years. Economic development will be constrained by reduced opportunities to make increasingly inclusive use of existing labour resources, aggravating domestic demographic challenges, and the markets of major trading partners expanding less than in the previous decade.

Table 1. Outlook for Lithuania’s economy