Lithuania’s real GDP is expected to increase by only 0.5% in 2023 due to persistent inflation weighing on private consumption. In 2024, real GDP is projected to slowly pick-up to 2.7%, as input costs and consumer prices subside and investment is set to be boosted by RRF funds. HICP inflation is forecast to slow down to 9.2% in 2023 on the back of a decline in energy and input prices, before further decelerating in 2024 as price pressures continue to ease. In 2023, the general government deficit is projected to increase to 1.7% of GDP, mainly due to increases in social spending, public investments, and decreasing tax revenue. In 2024 it is forecast to decline to 1.4%.
| Indicators | 2022 | 2023 | 2024 |
|---|---|---|---|
| GDP growth (%, yoy) | 1,9 | 0,5 | 2,7 |
| Inflation (%, yoy) | 18,9 | 9,2 | 2,2 |
| Unemployment (%) | 6,0 | 6,6 | 6,5 |
| General government balance (% of GDP) | -0,6 | -1,7 | -1,4 |
| Gross public debt (% of GDP) | 38,4 | 37,1 | 36,6 |
| Current account balance (% of GDP) | -5,3 | -1,1 | -0,1 |
Economic activity is dampened by geopolitical tensions
Following Russia’s full-scale invasion of Ukraine, economic activity was dampened by contracting private consumption over the last three quarters of 2022, driven by a drop in consumer confidence and household disposable income. Large supply chain disruptions drove input prices upwards and hindered the performance and competitiveness of industries in some sectors, putting a drag on investment. As a result, economic growth turned negative in the fourth quarter (-0.5%) and annual growth slowed down to 1.9% in 2022.
For 2023, economic activity is set to continue to be impacted by economic and geopolitical uncertainty. Growth is expected to benefit from a slight pick-up of private consumption, thanks to easing price pressures and improved purchasing power. Nonetheless, the high price of basic consumer goods, such as food and energy, is set to continue to subdue consumer spending. In addition, EU-funded investments, including those financed by the RRF, are projected to pick up and drive investments upwards. This should more than offsets the projected weak performance of some industries in light of weakening external demand and the tightening of financial conditions, resulting in a milder export growth. As a result, yearly growth in 2023 is expected to be only slightly positive at 0.5%.
In 2024, raw material and consumer prices are set to grow at a slower pace, while domestic and foreign demand is projected to strengthen. Coupled with further increased RRF-funded investments, economic activity in Lithuania is forecast to start gathering momentum with real GDP growth reaching 2.7% in 2024.
Labour market remains tight
Some signs of cooling in the labour market emerged at the turn of the year, with the number of vacancies decreasing and a slight pick-up in the unemployment rate. The slowdown in GDP growth is expected to negatively impact employment growth and lead to an uptick in unemployment. Over 2023, this is set to be translate into an overall decrease in employment of 0.6%, matched with an unemployment rate of 6.6%. However, as GDP growth picks up in 2024, the labour market is expected to tighten, partly due to adverse demografic developments, leading to a slight decrease of unemployment to 6.5%.
Inflation is on a declining trajectory
HICP inflation in Lithuania surged to 18.9% in 2022 but is expected to moderate to 9.2% in 2023 and 2.2% in 2024. Prices growth was already on a deceleration trend at the turn of the year, thanks to declining energy prices, owing in particular to the compensation of gas and electricity prices for households and businesses. In the coming months, core inflation is projected to stay elevated, but to decrease over the forecast horizon. HICP inflation is set to be dampened by the expected decline in the price of global energy and other commodities, and by the gradual easing of price pressures in Lithuania’s major trading partners. Wage growth is expected to slow down, albeit still remaining above HICP inflation levels.
General government deficit set to increase in 2023
In 2022, the general government deficit decreased to 0.6% of GDP due to lower-than-expected expenditure on energy support measures and intermediate consumption.
In 2023 the deficit is projected to increase to 1.7% of GDP. The government is planning to implement several projects that were partly scheduled for 2022 and should drive up intermediate consumption. In combination with additional spending on social benefits, indexation of pensions, public investment and higher interest expenditure this is expected to further increase the government deficit. At the same time tax and social security contributions revenue (as % of GDP) is expected to slightly decrease. The assumed decline of energy prices is set to contribute to limit the net budgetary cost of energy support measures to 0.7% of GDP in 2023, compared with 1.3% in 2022. Deficit developments in 2023 are also affected by the assumed phasing out of COVID-19 emergency temporary measures, which are estimated to have amounted to 0.4% of GDP in 2022
The deficit is projected to decline to 1.4% of GDP in 2024 as measures to mitigate the impact of high energy prices are phased out. The Commission currently assumes the net cost of energy support measures at 0.1% of GDP in 2024. However, the permanent expenditure measures aimed at increasing household disposable income (such as increases in social benefits and pensions) and raising interest expenditure are expected to continue to weigh on the public sector balance.
In 2023, public debt is forecast to reach 37.1% of GDP, and in 2024 the debt-to-GDP ratio is projected to decrease slightly to 36.6% due to denominator effects.