Following the Russian invasion of Ukraine, economic growth in Lithuania slowed down in 2022 to 1.9%. Quarterly growth was subdued throughout the year and turned negative in the fourth quarter (at -1.7%). Economic activity was dampened by falling exports to some eastern European countries and contracting private consumption, as high inflation was not compensated by the rise of labour income.
In the near term, economic activity is set to continue to be impacted by economic and geopolitical uncertainty, the deteriorating financial situation of companies and weakening purchasing power of households. Only moderate quarterly growth is forecast for the entire 2023. Overall, growth is expected to reach 0.3% in 2023, down from the 0.5% growth forecast in autumn. In 2024, growth is projected at 2.5%, driven by stronger private consumption expenditure. Additionally, increased EU funds absorption, notably of the RRF, is set to support aggregate investment in both 2023 and 2024.
Following its peak in September 2022, headline HICP inflation has started declining on the back of plunging global oil prices and domestic efforts to curb the energy price increase for consumers, including the VAT rate cut on heat energy. Non-energy price inflation, by contrast, is still relatively high, possibly reflecting the lagging effects of costs that surged in the previous months. Nevertheless, following 18.9% inflation in 2022, the rate of price growth is projected to decrease to 8.7% in 2023 and 2.1% in 2024. Weaker activity both in the domestic economy and in major trading partners, easing shortages of various production inputs, and a gradual decline in global energy prices are expected to contribute to the declining dynamics of inflation.