“russia’s war against Ukraine and resulting uncertainty continue to affect the economies of Lithuania and of the European Union as a whole. Despite challenges, the national economy demonstrates resilience — Lithuania should remain on the path of growth. Stabilisation of the situation in international energy markets will lead to lower inflation than we had previously predicted in 2023 — price increases are expected to return to a single-digit area. Average wage growth is expected to remain strong this year, to be above the average annual inflation, which is good news for purchasing power of population”, stated Minister of Finance Gintarė Skaistė.
The economic development scenario prepared by the Ministry of Finance projects that this year the change in Lithuania’s gross domestic product (GDP) will reach 0.5 %, while in 2024-2026 the economic growth is expected to increase and reach about 3 % per annum.
In 2023, the war in Ukraine will negatively affect economic activity and the labour market in Lithuania, but this negative impact will not be particularly significant. The number of employed population is expected to decline by 0.7 % this year, and the unemployment rate will rise up to 7 %. As economic activity recovers as of 2024, the unemployment rate will gradually decrease to 6.8 %, and will be close to 6 % in outer medium-term years.
The scenario projects that this year the growth rate of wages in the country will remain high and will reach 9.1 %. This year, as well as last year, it will be stimulated by the decisions taken along with the budget for 2023 concerning the increase in the salaries of public sector employees — teachers, doctors, officials, etc., increased basic salary for civil servants and other employees of budgetary institutions, increased minimum monthly wages (MMW) (by 15.1 % to EUR 840), as well as the shortage of skilled workers faced by both the private and the public sector.
In 2023, household consumption expenditure will grow at a similar pace, as last year, — 0.5 %, and in the medium term (in 2024-2026) it is expected to grow 3.4 % annually as a result of a stronger purchasing power and rising expectations of the population.
Taking into account the development trends of consumer prices and technical assumptions regarding the evolution of energy prices, the average annual inflation in the country is expected to reach 8.5 % in 2023 (by 0.9 pp. less than projected in the economic development scenario of December 2022). In outer medium-term years, presuming that energy commodity prices remain stable, the rate of inflation should be close to 2 %. Uncertainty about the course and consequences of the war in Ukraine and the evolution of energy prices will remain key risk factors for inflation over the medium term.
Increased economic uncertainty persisting this year and tightening monetary policy will lead to more sluggish private sector investment. However, the investment process activity will be driven by the expected acceleration of the implementation of projects financed by the European Union Funds and the Recovery and Resilience Plan. Expenditure on gross fixed capital formation is expected to be by 2.7 % higher in 2023. Under persisting shortage of adequately skilled workers, the need to increase labour productivity and seeking to reduce dependency on fossil fuels as well as to increase economic potential of the country, the investment process should intensify in outer medium-term years. In 2024-2026, the investment costs in the country could increase by 5.4 % annually.
The deteriorated external environment negatively affects Lithuania’s export dynamics. The annual change in exports of goods and services (at constant prices) is projected to be 0.0 % this year, and in outer medium-term years, after the recovery of foreign demand, the growth is expected to be 4.9 % per year.
The economic development scenario has been developed in a context of increased instability in the external environment and economic uncertainty, still ongoing vigorous military actions in Ukraine. The magnitude of the negative economic consequences caused by the war for Lithuania will depend on how long the military actions in Ukraine will take and how the countries of the European Union will be able to cope with energy challenges. The challenges posed by new virus strains also remain among the negative risk factors.
There are also positive risks — stronger domestic and foreign demand, fiscal policies that promote economic growth, effective implementation of the Plan “New Generation Lithuania” and implementation of other EU-funded projects, better demographic trends and immigration of skilled workers, etc.
The full version of the economic development scenario for 2023–2026 is available here.
The presentation can be found here.
Additional information:
The economic development scenario has been developed considering the actual development of the Lithuanian economy in 2022, the measures provided for in the Republic of Lithuania Law on the Approval of Financial Indicators of the State Budget and Municipal Budgets for 2023, the changes in the monetary policy and external environment that took place after the scenario was published by the Ministry of Finance in December 2022.
The date of inclusion of statistics and other information in the economic development scenario is 1 March, inclusive.
