2025-09-16
Lietuvos bankas’ projection: economic growth persists despite slower pace this year
Domestic and external decisions adopted this summer, such as on US trade tariffs, second-pillar pension system reform, and tax changes, will have a significant impact on Lithuania’s economic development in the coming years. This will increase economic fluctuations but will not derail growth. Pension and tax reforms will have a greater impact on economic development in the short term, however US customs tariffs will more greatly affect economic activity over the next few years.
“Uncertainty in the Lithuanian and global economy decreased over the summer, and now we see a slightly clearer outlook for the future. While reforms to the second-pillar pension system, tax changes, and higher trade tariffs will affect economic developments in the coming years, they will not alter the overall direction of the economy, which will remain on a growth path. It is also important that wage growth continues to outpace inflation, meaning that people will have more opportunities to save and consume,” says Gediminas Šimkus, Chair of the Board of Lietuvos bankas.
According to Lietuvos bankas’ projections, Lithuania’s gross domestic product will grow by 2.7% this year, i.e. 0.1 percentage points less than projected in June. The economy is expected to expand by 3.2% in 2026 and 2.3% in 2027.
Compared to the June projections, the economic growth rate for next year has been increased by 0.4 percentage points, while that for 2027 has been reduced by 0.6 percentage points. This is mainly related to the second-pillar pension system reform, which is expected to lead to significantly higher private consumption next year, however its growth should slow down significantly in 2027, as most of the withdrawn funds will be spent as early as next year.
It was precisely sluggish private consumption that dampened Lithuania’s economic growth at the beginning of this year. It is currently recovering and is expected to increase by 2.2% in the course of 2025, or 1.6 percentage points less than projected in June.
In 2026, funds withdrawn from second-pillar pension funds should reach the market. We assume that 20% of residents saving in the pension funds will withdraw their funds during the first wave, and the amount of funds withdrawn could reach around €1.13 billion. We predict that the residents will spend most of the funds received to purchase goods and services, so private consumption will expand by 6% next year. However, after such short-term spending, during which some residents will use up their savings accumulated for retirement, growth will slow to a mere 0.8% in 2027. A second wave of withdrawals is likely to occur at the end of the withdrawal window, but its impact is beyond the horizon of the current macroeconomic projections.
US trade tariffs will slow Lithuania’s economic growth by 0.3 percentage points in 2025–2027, which is 0.1 percentage points more than projected in June. This is due to the fact that the effective US tariff rate applied to Lithuania, following the agreement between the European Union (EU) and the US, rose from 8.3% to 13.3% compared to the information available in June.
The geopolitical situation and US trade tariffs materially affect Lithuanian exports, which are expected to grow much more slowly over the projected period than in the last decade. Total Lithuanian exports are expected to expand by 3.8% this year and by 2% and 3.4% in 2026 and 2027, respectively. In the future, competition with Chinese manufacturers targeting the European market may also pose a risk to exports.
Weaker growth in exports of goods and services than in the last decade should be at least partially offset by investments, which are expected to grow by 5.7% this year and by 5.4% and 3.1% in 2026 and 2027, respectively. Most of the investment growth will come from the private sector, which will invest in equipment upgrade, production capacity, and modernisation.
Public sector investment will continue to be driven by significant inflows from EU support funds, with most of the funds expected to go towards green transition, digital transformation, and sustainable and smart economic growth. Higher defence spending will also greatly affect public sector investment.
Slower economic growth is evident in the labour market. Employment fell in most sectors, the unemployment rate rose and is expected to reach 7.1% this year, which is 0.4 percentage points higher than projected in June. The unemployment rate is expected to fall to 6.6% and 6.5% in 2026 and 2027, respectively.
The rise in the unemployment rate reduced pressure to raise wages. Average wages, which rose by 10% last year, are expected to increase by more than 8% in 2025. In 2026, their annual growth will accelerate to almost 9%, however it will be below 7% in 2027. Despite slower wage growth, it will continue to outpace inflation, thus the real purchasing power of the Lithuanian residents will increase.
Average annual inflation is expected to reach 3.5% this year, 3.1% next year, and only in 2027 will it return to 2.6%, a level typical of economies approaching living standards in the Western countries. This year and next, the biggest contributors to price growth will be rising prices for food and services. The largest contribution to food price growth comes from higher prices for alcoholic beverages, dairy and meat products, as well as tobacco, which are driven by taxes and rising commodity prices.
About a quarter of the rise in consumer prices over 2025–2027 will be determined by previously adopted tax changes, which were already included in the June projections, and new tax changes adopted this year, which will come into force at the beginning of next year.
Further information on the projected economic development is available on the website of Lietuvos bankas and in the publication “Lithuanian Economic Review”.