Lithuania’s real GDP is expected to grow by 2% in 2024, supported by a strong increase in private consumption, continued investment growth and a gradual improvement in trade. In 2025, real GDP is projected to grow faster, by 2.9%, as the EU and euro area economy picks up speed and trade resumes more vigorously. HICP inflation is forecast to slow down substantially to 1.9% in 2024 following the fast decline in energy prices, before stabilising at 1.8% in 2025 as services inflation eases. In 2024, the general government deficit is projected to increase to 1.8% of GDP, mainly due to increases in social spending, public wages, and current transfers paid by the government. In 2025, it is forecast to further increase to 2.2%.
Indicators | 2023 | 2024 | 2025 |
---|---|---|---|
GDP growth (%, yoy) | -0.3 | 2.0 | 2.9 |
Inflation (%, yoy) | 8.7 | 1.9 | 1.8 |
Unemployment (%) | 6.9 | 7.0 | 6.9 |
General government balance (% of GDP) | -0.8 | -1.8 | -2.2 |
Gross public debt (% of GDP) | 38.3 | 38.9 | 41.6 |
Current account balance (% of GDP) | 0.6 | 0.3 | -0.3 |
Economic activity set to improve gradually
Amid high inflation, trade disruptions and dampened confidence, real GDP contracted in 2023. This was driven by a decrease in private consumption for two quarters and falling real exports in goods throughout the year. Weak external demand, low real wage growth given high inflation, and an increase in savings further contributed to the weak GDP performance. At the same time, exports in services remained strong, and investment grew fast, keeping the contraction for the year to only -0.3%. Overall, the economy is set to resume growth in 2024 pushed by a pick-up in consumption and a gradual improvement in EU and global growth.
In 2024, easing inflation and continued growth in nominal wages are set to support private consumption as real incomes improve. Investment is projected to continue growing albeit at a slower pace than in 2023, through EU-funded investments in public infrastructure, investments in intangibles and investments in defence and energy. Trade in goods is expected to improve gradually throughout the year as growth resumes in trading partners in the EU and globally. In 2025, the same factors are set to improve growth further to 2.9%, though private consumption growth could be limited by uneven wage growth across sectors, and already high savings could signal differentiation across income brackets. The pace of growth of exports will depend on the pace of the recovery in the EU and globally.
Labour market to loosen temporarily
Some signs of cooling in the labour market emerged in 2023 and are set to continue in 2024, with a slight pick-up in the unemployment rate to 7% and the continued inflow of people fleeing Ukraine and participating in the labour market. In 2025, however, an expected decrease in the numbers of displaced persons remaining in Lithuania and natural population decline are set to reverse the labour market loosening. The unemployment rate is forecast to rise from 6.9% in 2023 to 7.0% in 2024, and to decrease back to 6.9% in 2025 as the working-age population decreases. Labour market tightness is expected to drive wage growth to around 7-8% annually over the forecast horizon.
Inflation expected to stabilise at lower levels
HICP inflation moderated to 8.7% in 2023 and is expected to decline substantially to 1.9% and 1.8% in 2024 and 2025. Declining energy prices and a significant slowdown in price growth for the remaining components of HICP will continue to bring down both headline inflation and inflation excluding energy and food. However, services inflation is expected to decrease more slowly as wage growth continues, albeit with a gradual slowing over 2024 and 2025.
General government deficit set to increase
In 2023, the general government deficit increased slightly to 0.8% of GDP due to increases in social spending, growth in public investments and rising public wages. Expenditure on measures to mitigate the impact of high energy prices was partially phased out, saving 0.9 pp. of GDP (expenditure decreased from 1.2% of GDP in 2022 to 0.3% and less than 0.1% in 2023 and 2024, respectively). Even though total expenditure grew significantly (1.9 pps. of GDP) in comparison to 2022, it was partly matched by growing revenue from better collection of the labour taxes, as well as the temporary bank solidarity contribution.
In 2024, the deficit is projected to increase to 1.8% of GDP. The increase is set to be driven by rising general government expenditure (by 2.1 pps. of GDP), while revenue is expected to increase at a slower pace (by 1.1 pps. of GDP). A 2022 reform of the pension indexation rules is the main contributor to the increase in social spending, which is projected to rise by 0.9 pps. of GDP. An increase in public wages (0.4 pps. of GDP), current transfers paid by the government (0.4 pps. of GDP), and higher interest expenditure (0.1 pps. of GDP) are the three other major contributors to higher expenditure. The increase in current transfers expenditure is mainly associated with a higher number of transfers intended for currently indeterminate purposes which might be later reclassified. General government revenue is forecast to increase mainly due to social contributions, which are rising in line with increasing salaries, and to an increase in VAT and excise duties revenue (thanks to the “green package” adopted in 2023, which raised excise duties for polluting fuels, and the phasing out of the temporary VAT relief for restaurants and catering services).
Based on unchanged policies, the deficit is projected to increase further to 2.2% of GDP in 2025, mainly due to rising social spending. A 26% increase in the ‘minimum consumption basket’, to which many social benefits are indexed to, is forecast to increase social spending by 0.6 pps. of GDP.
In 2024, public debt is expected to increase to 38.9% of GDP. In 2025, the debt-to-GDP ratio is projected to further increase to 41.6% due to the increasing deficit and stock flow adjustments.