Lithuania’s real GDP is expected to increase by only 2.5% in 2022 and 0.5% in 2023 as a result of heightened uncertainty, deteriorating prospects for trading partners and surging input costs and consumer prices. HICP inflation is forecast to reach 18.9% in 2022 before falling substantially in the coming years. In 2022, a relatively high general government revenue is lowering the deficit. However, the projected increase in general government expenditure due to measures to mitigate the economic and social impact of high energy prices and to help people fleeing Ukraine is set to result in a significantly higher deficit in 2023, before it moderates again in 2024.
Last update (forecast)
|GDP growth (%, yoy)||6,0||2,5||0,5||2,4|
|Inflation (%, yoy)||4,6||18,9||9,1||2,1|
|General government balance (% of GDP)||-1,0||-1,9||-4,4||-1,8|
|Gross public debt (% of GDP)||43,7||38,0||41,0||39,9|
|Current account balance (% of GDP)||1,1||-3,9||-2,8||-2,6|
Economic activity is dampened by geopolitical tensions
Russia’s invasion of Ukraine has led to a drop in confidence, large intermediate input supply disruptions and a considerable loss of exports to Russia, Belarus and Ukraine. At the same time, the strong growth in consumer prices, exceeding the growth of household disposable income, has had a negative impact on private consumption. The surge in energy and other input costs has led to competitiveness losses in some economic sectors and has put a drag on investment. As a result, growth of real GDP is losing pace, and the economy is expected to start contracting in the end of 2022. Nevertheless, real GDP is still forecast to increase by 2.5% in 2022 owing to good economic performance in the beginning of the year.
Growth of real GDP is projected to slow down in 2023 to 0.5%. Considerably higher commodity and consumer prices, heightened interest rates and lasting uncertainty are expected to dampen economic growth in Lithuania’s major trading partners, exerting an unfavourable influence on Lithuanian exporters. Higher prices are also forecast to put a drag on domestic demand. In the medium term, as raw material and consumer prices are expected to grow at a slower pace and foreign demand is projected to strengthen, economic activity in Lithuania is forecast to start gathering strength, with the growth rate of real GDP reaching 2.4% in 2024.
Labour market remains tight
In contrast to external factors, the tight labour market is set to continue supporting economic activity. Despite higher uncertainty about the economic outlook, the number of employed keeps rising and the unemployment rate continues falling. A significant number of people fleeing from Ukraine and actively searching for work opportunities has joined the ranks of the employed, thereby helping to address the lack of employees. The vacancy rate, however, remains high, and there is still a large number of firms for which the shortage of workers is limiting growth. This is forecast to drive growth in wages despite weaker developments in labour productivity.
Weaker growth is accompanied by elevated inflation
HICP inflation in Lithuania is expected to surge to 18.9% in 2022, but to moderate to 9.1% in 2023 and 2.1% in 2024. Signs of stabilising growth of prices are becoming evident in some groups of goods, while growth of energy prices has been restricted thanks to government measures and lower growth of global oil prices. In the coming months, inflation is projected to stay elevated, but it is anticipated to decrease over the forecast horizon. Inflation is set to be dampened by the expected decline in global energy and other commodity prices, gradual ease of price pressures in the major trading partners, considerably slower growth of wages and a drop, albeit temporary, in purchasing power of households.
General government deficit set to increase in 2023
After a significant decline in 2021, the general government deficit is projected to increase slightly to 1.9% of GDP in 2022, before rising significantly to 4.4% of GDP in 2023.
In 2022, high inflation and wage growth have been driving up the tax revenue (mainly through the relatively high revenue from taxes on production as well as on personal income and wealth). Thus, despite the significant increase in subsidies on energy products, the general government deficit increased only slightly in comparison to 2021.
In 2023, the deficit is projected to be mainly impacted by changes on the expenditure side. Planned government measures to mitigate the economic and social impact of high energy prices are expected to increase the deficit by around 1.5 pps. in 2023. Spending on social benefits, health care, education and other related needs of people fleeing from Ukraine as well as indexation of pensions are expected to further increase general government expenditure while the tax revenue is forecast to remain relatively stable.
The deficit is projected to decline to 1.8% of GDP in 2024 as measures to mitigate the impact of high energy prices are withdrawn. The measures to increase household disposable income are expected to continue to weigh on the public sector balance, but also to be partly offset by higher tax revenue due to the pick up in economic activity and expected tax reforms.
In 2022, public debt is set to stand at 38.0% of GDP. The debt-to-GDP ratio is projected to increase to 41.0% in 2023, mainly due to the high general government deficit, before it slightly decreases to 39.9% in 2024 as the denominator, nominal GDP, continues to grow.