Lithuania’s economic development and outlook

16 September 2025

Following changes in US trade policy, the global economy continues to grow, but its development is rather uneven. Customs tariffs on US imports have not increased to the extent discussed, although the associated uncertainty has had, and continues to have, an impact on the economies of many countries. Fears of a significant rise in US customs tariffs led to inventory build-up in the country, which had a positive impact on production and exports in various regions of the world in the first months of this year. For a while, the growth of international trade stimulated investment and contributed to the recovery of stock markets. After a sluggish start to the year, the situation in the services sectors improved in most countries. The relatively good situation in the labour markets, the less negative than feared impact of higher customs tariffs, and the waning impact of the previously tightened monetary policy had a favourable effect on service-oriented economic activities. However, the short-term outlook for the global economy is less positive. The surge in manufacturing and international trade was likely short-lived. In the second half of the year, the tradable sector may face more challenges due to emerging trade restrictions, hence the outlook for international trade for the coming quarters is cautious and has been slightly revised down.

Economic activity in Lithuania is broadly in line with previous projections, however there are increasing signs of growth slowdown. In the first half of 2025, the average quarterly change in real gross domestic product (GDP) was about half the level observed in 2024.[1]

[1] The data used for the analysis are adjusted for seasonal and workday effects.

At the beginning of the year, private consumption declined as prices rose faster than household incomes. Demand for semi-durable goods[2]

[2] These goods include clothing, footwear, household textiles, small household appliances, and other semi-durable goods.

and services fell particularly sharply. Later, in the second quarter, consumption grew but did not reach the level observed at the end of last year. Construction activity did not increase in the first half of this year. After immensely strong growth in the previous year, there was a decline in the construction of engineering structures, a significant part of which is financed by European Union (EU) support funds. Although the construction of non-residential buildings expanded, this was insufficient to sustain the previous growth pace in the construction sector. The situation in the manufacturing sector was better, especially at the beginning of the year. Just as in many countries, production increased in the first months of this year, partly due to more active international trade before the possible introduction of higher customs tariffs. At the start of the year, industrial orders returned to almost normal levels. Later, production began to decline both due to weaker external demand and production limitations at one of the fertiliser plants, though industrial output did not fall as much as it had increased at the beginning of the year.

Labour income has moderated, but the situation in the labour market remains favourable for the employed. The average quarterly change in wages during the first half of this year was lower than last year.[3]

[3] The data used for the analysis are adjusted for seasonal effects.

Slower growth was observed in most economic activities. This was likely due to heightened uncertainty about the international economic and geopolitical situation and the already substantial increase in the labour share. With nominal wages rising more slowly than prices, the household purchasing power has changed less favourably, albeit it has increased.[4]

[4] The average change in real labour income per quarter in the first half of this year was positive. This income was higher than a year ago.

The rise in real wages is supported by the continuing lack of employees. Fewer undertakings than a few years ago cite insufficient supply of staff as a factor limiting growth, however the share of such undertakings does not fall below the historical average. Demographic changes contribute to labour shortages. Net international migration (of both Lithuanian and non-Lithuanian nationals) remains positive, though the positive balance is significantly lower than in 2022–2023. After growing for three consecutive years, Lithuania’s population has remained virtually unchanged this year. This is partly reflected in labour market indicators, with labour force and the number of employed persons no longer growing. Among other factors, labour shortages are apparently exacerbated by the issue of skills mismatch, which contributes to the gradual increase in long-term unemployment. The latter has been rising for about two years.

In the near future, economic fluctuations will be significantly affected not only by the international environment but also by the forthcoming reforms. The withdrawal of funds from second-pillar pension funds (SPPF) and the resulting increase in disposable funds of the population are expected to accelerate economic growth in 2026.[5]

[5] The macroeconomic projections assume that the most intensive withdrawal from the SPPF will take place in 2026, with 20% of its participants withdrawing from the SPPF (at this stage, no assumptions are made about withdrawal from the SPPF in 2027). It is assumed that the majority of the withdrawing participants (90%) will be financially constrained individuals who tend to spend the withdrawn funds immediately. Such withdrawals will have an upward effect not only on private consumption but also on other economic indicators, such as private sector investment, wages, the number of employed persons, and the overall level of consumer prices. Under these circumstances, the withdrawal of one-fifth of participants from the SPPF would result in 2026 in a real GDP growth rate approximately 0.5 percentage points higher and an inflation rate 0.1 percentage points higher than if the second pillar-pension system remained unchanged. However, the positive impact on economic growth would be short-lived, as the withdrawal of funds from the SPPF would 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 0.6 percentage points lower than if the pension system reform in question were not implemented. The impact on inflation in 2027 would be close to neutral.

Real GDP is expected to grow by 3.2% next year, following an increase of 2.7% this year. At the same time, economic growth will be less favourably affected by foreign demand and exports, as demand for imported goods in various countries is likely to weaken in the second half of the year and next year, following the intensification of international trade and inventory build-up in the first half of this year. Increased customs tariffs will also restrict international trade, although their impact on Lithuania’s economic development will be limited.[6]

[6] The macroeconomic projections assume 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 the EU will not take retaliatory measures. Under this scenario, the change in trade policy could reduce Lithuania’s real GDP growth rate by a total of 0.3 percentage points over 2025–2027, 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, thus they will be affected more, which will also have an adverse impact on Lithuanian producers.

From 2026, economic growth will be constrained by discontinued increase in EU support funds, which have a significant impact on investment developments. The tax changes adopted in June this year will have a modest yet limiting effect on economic activity.[7]

[7] Due to the upcoming tax changes adopted in June 2025, Lithuania’s real GDP growth rate over the projection horizon (2026–2027) is likely to be 0.1 percentage points lower than it would have been without such tax changes. The calculation only takes into account the impact of future tax changes and does not consider where and when tax revenues will be used. Economic activity will be most constrained by increases in direct taxes, particularly personal income tax. Due to the future tax changes adopted in June this year, the overall consumer price level is likely to go up by 0.5%. It will be driven mainly by higher indirect taxes.

In 2027, economic growth will slow down significantly as the positive impact of funds previously withdrawn from the SPPF disappears. Private consumption growth is expected to decline particularly drastically, as it will be limited not only by more limited possibilities to boost expenditure, but also by falling demand for durable goods, which is likely to increase more when funds begin to be withdrawn from the SPPF. The real GDP growth rate is projected to reach 2.3% in 2027.

After rising at the beginning of the year, inflation remains elevated. Inflation was driven by higher food price increase and energy prices that almost stopped falling. Just as in many countries, the rise in food prices was partly due to the increase in international food commodity prices that began last year, reflecting both buoyant demand for these commodities and uneven supply. The rise in food prices, including alcoholic beverages and tobacco, in Lithuania was also driven by higher indirect taxes, which account for about a quarter of the annual increase in these prices.[8]

[8] Based on data of harmonised indexes of consumer prices at constant tax rates.

Energy product prices have been suppressed for some time by falling oil prices (falling for three consecutive years), reflecting abundant supply and sluggish demand for this commodity. However, energy product prices were boosted by higher prices for gas at the turn of the year. Indirect taxes also pushed up energy product prices in Lithuania. This year, all changes in indirect taxes have boosted Lithuania’s inflation rate by approximately 0.8 percentage points, which is the largest impact of indirect taxes on inflation since 2017. Just as in previous years, rising labour costs also contribute to overall price growth. Wages are not growing as much as in previous years, but they still outpace productivity growth, thus putting pressure on prices.

Inflation rate is expected to remain higher in the near term. It is projected to stand at 3.5% and 3.1% in 2025 and 2026, respectively. In addition to the previously planned increase in indirect taxes, next year inflation will be affected by tax changes adopted in June 2025. The impact of all tax changes on inflation next year could reach 1.2 percentage points. In 2026, inflation will also be driven by the partial withdrawal of residents from the SPPF. At the same time, inflation is expected to be suppressed by falling energy prices and stagnant food commodity prices. Labour costs will have no greater impact on inflation than they have had recently. In the long run, with the reduced impact of tax increases, the waning effect of price-increasing withdrawals from the SPPF, and lower growth in labour costs, inflation rate is expected to fall. It is projected to stand at 2.6% in 2027.

Outlook for Lithuania’s economy

	September 2025 projectiona				June 2025 projection
		2025b	2026b	2027b		2025b	2026b	2027b
Price and cost developments (annual percentage change)
Average annual HICP inflatione		3.5	3.1	2.6		3.3	2.5	2.6
GDP deflatorc		3.6	3.3	2.9		3.3	3.2	3.1
Wages		8.2	8.9	6.9		8.7	8.3	7.7
Import deflatorc		-0.5	1.3	2.3		0.6	1.8	2.5
Export deflatorc		0.1	1.4	2.3		0.2	2.1	2.5
Economic activity (constant prices; annual percentage change)
GDPc		2.7	3.2	2.3		2.8	2.8	2.9
Private consumption expenditurec		2.2	6.0	0.8		3.8	4.0	3.7
General government consumption expenditurec		0.9	0.1	0.1		0.5	0.1	0.1
Gross fixed capital formationc		5.7	5.4	3.4		6.9	5.2	3.5
Exports of goods and servicesc		3.8	2.0	3.4		3.3	2.7	3.5
Imports of goods and servicesc		5.2	3.4	2.5		6.9	2.8	3.5
Labour market
Unemployment rate (annual average as a percentage of labour force)		7.1	6.6	6.5		6.7	6.6	6.5
Employment (%, annual percentage change)d		-0.2	0.1	-0.3		0.3	-0.3	-0.2
External sector (percentage of GDP)
Balance of goods and services		4,6	3,7	4,3		2,5	2,6	2,6
Current account balance		1,4	0,4	0,8		-0,4	-0,5	-0,8
Current and capital account balance		3,6	2,2	1,6		1,9	1,3	0,0

a The macroeconomic projections are based on external assumptions, constructed using information made available by 15 August 2025, and other data and information made available by 1 September 2025.

b Projection.

c Adjusted for seasonal and workday effects.

d National accounts data; employment in domestic concept.

e Harmonised Index of Consumer Prices.

Gedimino pr. 6, LT-01103 Vilnius

www.lb.lt

Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged.

ISSN 2783-557X (online)

Macroeconomic Projections (September 2025)

Lithuania’s economic development and outlook