“After withholding the challenges in 2023, the Lithuanian economy will return to the growth path next year. With inflation hikes left behind and wage growth at a rather rapid pace, the purchasing power of population will increase in 2024, which will boost domestic consumption. The decisions adopted with the next year’s budget also contribute to this“, said Minister of Finance Gintarė Skaistė.
The Economic Development Scenario prepared by the Ministry of Finance projects Lithuania’s gross domestic product (GDP) to shrink by 0.4 % this year, and to grow by 1.7 % in 2024. In 2025-2026, economic development is expected to reach 2.9 % per year.
Despite the slowdown in economic activity, the labour market remained stable this year, with the unemployment rate standing at 6.6 %. The unemployment rate is expected to remain at the same level next year, and the growth of the number of the employed will reach 0.3 %. As economic activity recovers more rapidly in the following medium-term years, the unemployment rate is expected to decrease to 6.4 % in 2025 and 6.3 % in 2026.
The scenario projects that wage growth will remain strong this year – it will account for 12.5 %. With a more moderate wage growth in the private sector, it will reach 7.6 % in 2024. In 2025 -2026, the average wage could grow 5 % per year.
Both this year and next year, wage growth will significantly surpass the growth rate of prices. In 2023, the average annual inflation will be 8.8 %, and more favourable price development than last year will be affected not only by lower energy prices, but also by normalisation of global supply chains and tightening monetary policy. In 2024, the average annual inflation is expected to fall to 2.8 %. From 2025 onwards, inflation is set to move closer to the European Central Bank’s inflation target of 2 % in the euro area, reaching 2.3 % to 2.4 %.
As household disposable income continues to grow and inflation declines, the purchasing power of the population will continue to strengthen. After decrease in household consumption expenditure on goods and services by 0.8 % this year, it will increase by 3.1 % in 2024. In the following medium-term years (in 2025-2026), as prices no longer have such a strong impact on the purchasing power of population, and income growth continues, household consumption expenditure is expected to grow faster – by 3.4 % per year.
Investment in Lithuania grew 10.1 % in January - September 2023. The 19.3 % increase in investment in other machinery, equipment and weapon systems contributed significantly to the change in gross fixed capital formation (GFCF). An intensified investment process was also observed in the construction of non-residential buildings and structures – investment in other buildings and structures were by 14.7 % higher in January - September 2023. The investment growth is expected to be more moderate at the end of 2023 and next year, with GFCF spending growing 9 % over the entire 2023 and 3.5 % in 2024. In the following medium-term years, after adapting to the changed financing conditions, a more stable external environment and the increased need to enhance operational efficiency, expenditure on the formation of the GFCF could grow 5.4 % per year.
The scenario foresees that due to changes in the monetary policy and the consequences of the war in Ukraine, global demand for exports from Lithuania will be dampened this year, while possibilities to increase export volumes will depend on the flexibility of exporting companies and the ability to invest in technological progress and productivity-enhancing measures. It is projected that in 2023 the annual change in exports of Lithuanian goods and services (at constant prices) will be -4.4 %. As external demand recovers, exports are expected to recover in 2024 with the growth of 4.5 %. In 2025-2026, exports are expected to reach 5.2 % per year.
The Economic Development Scenario has been drawn up under exceptionally high external environmental instability and economic uncertainty due to the emergence of new geopolitical tensions in the Middle East, under still ongoing global tightening of monetary policy and active military actions in Ukraine.
The escalation of the war in Ukraine and disruptions in supply chains, the escalation of the conflict in the Middle East and new geopolitical tensions, excessive tightening of the monetary policy, accelerated price growth of energy and other commodities and food, less favourable developments in the euro area and the global economy, fluctuations in global financial markets, ageing society and workforce shortage, new outbreaks of the COVID-19 virus are part of the negative risk factors that may alter the estimates of the basic indicators in this scenario.
There are also positive risks, such as stronger domestic and foreign demand, growth-enhancing fiscal policy, more effective implementation of the plan “Next Generation Lithuania” and other EU-funded projects, better demographic trends and the immigration of skilled workers, accelerated green energy transition.
Additional information:
The Economic Development Scenario was prepared after assessment of the data of the National Accounts for January-September 2023 and other statistical data published by 30 November 2023, taking into account the changes in the monetary policy and in the external environment that occurred after the scenario was published by the Ministry of Finance in September 2023, the changed statistical base for the preparation of projections and the measures provided for in the draft Republic of Lithuania Law on the Approval of Financial Indicators of the State Budget and Municipal Budgets for 2024. The scenario assumptions on external environment and energy prices (oil and natural gas) are in line with the European Commission’s economic forecast published in November this year.
