The Lithuanian economy will continue to grow this year, but households will feel the impact of rising prices more acutely as energy costs increase. Average annual inflation is projected to exceed 5% before moderating next year. The latest projections by Lietuvos bankas indicate that wage growth will outpace inflation throughout the projection horizon, supporting further increases in households‘ purchasing power.
‘Higher energy costs this year have once again highlighted how quickly external shocks can affect everyday life. Nevertheless, the Lithuanian economy is proving resilient, supported by growing exports, investment financed through EU funds, and increased defence spending. It is also important that the surge in energy prices does not translate into long-term inflation. As energy price pressures ease, inflation is expected to moderate significantly next year,’ says Gediminas Šimkus, Chair of the Board of Lietuvos bankas.
Lietuvos bankas projects the economy to grow by 2.7% this year, 2.4% in 2027 and 3.1% in 2028. Compared to June, the growth projection for next year has been revised up by 0.4 percentage points, while that for 2028 has been revised down by 0.2 percentage points.
The revisions largely reflect the impact of the second-pillar pension reform, which has been more limited than previously expected. Individuals are taking time to spend the withdrawn funds. By August, €3.5 billion had been transferred to account holders. Lietuvos bankas estimates that around €0.6 billion had been spent on consumption by the end of June. Some of the withdrawn money may still be spent later but this is unlikely to provide a significant additional boost to the domestic demand in the near future. Consequently, this year and next year, economic growth will be more moderate than previously projected.
Exports will contribute more to economic growth this year and next year, supported by stronger demand from Lithuania’s trading partners. Investment trends also remain favourable on the back of EU-funded projects and rising defence spending.
Lietuvos bankas projects domestic consumption to go up by 3% this year and 1% in 2027. Real exports are expected to increase by 4.8% and 3.6%, respectively, while investment is projected to rise by 8.2% and 5.7%.
Tensions and uncertainty in the Middle East have led to a surge in energy prices, which spilled over to other prices, particularly transport services. The overall rise in prices has been tempered by a slower increase in food prices. Average annual inflation is expected to be 5.1% this year, although it may exceed 6% in some months.
In the coming years, inflation is expected to decline steadily and, by the end of the projection horizon, to return to a level typical of an economy converging towards Western living standards. This will be primarily driven by declining energy prices, slower wage growth and weaker impact of taxes. Average annual inflation is expected to be 3.1% in 2027 and 2.6% in 2028.
The labour market situation remains favourable for employees. Wage growth is supported by strong demand for labour but the scope for further increases in employment will be increasingly constrained by the declining working-age population and weaker migration flows.
Unemployment is expected to stand at 6.7% this year and fall to 6.6% in 2027. Average wages are expected to rise by 9.4% this year and 7.6% next year.
Source: lb.lt
