OECD Economic Outlook, Volume 2018 Issue 1

Lithuania

Growth is projected to moderate but remain solid at just above 3% in 2018‑19. Strong investment on the back of increased EU funds disbursements and growing business spending will support activity, mitigating the impact of skills shortages and a shrinking labour force. Underlying price pressures are set to continue, driven by buoyant demand and increasing wages as the economy operates above capacity.

The fiscal stance is poised to remain appropriately broadly neutral over the projection period. Budget measures to boost productivity and reduce high inequality and poverty, including increases in social benefits and tax incentives for innovation, are welcome. Making growth more inclusive further requires reducing informality and increasing the labour‑market relevance of the education system to ensure appropriate skills. Effective activation schemes and upskilling, through lifelong learning programmes, would help job seekers to find new, quality jobs.

Growth is broad-based

The economy has been growing at a firm pace. Investment strengthened, fostered by a faster absorption of EU funds and high capacity utilisation. Private consumption continued to be supported by rapid wage increases and credit expansion, with the recent increases in social benefits boosting household incomes further. On the other hand, export growth weakened, partly reflecting an end to strong exports to Russia to rebuild inventories. Real wages grew faster than productivity in recent years without bearing, so far, on competitiveness and export performance. Inflation has receded as the impact of last year's hikes in some excise duties is abating; service price inflation remains elevated, however, reflecting strong wage and domestic demand growth.

Further reforms are needed to make growth stronger and more inclusive

Interest rates are low as euro area monetary policy remains accommodative and credit to the private sector is growing, fuelling house market activity and prices. As private sector indebtedness and house prices remain modest compared to historical highs, risks to financial stability appear contained. Even so, if signs of overheating emerge, the authorities will have to use macro‑prudential measures.

Lithuania

1. Non-residential and government fixed capital formation, volume.

Source: OECD Economic Outlook 103 database; and Statistics Lithuania.

Statlink

The 2018 budget aims to reduce poverty and inequality by increasing social benefits and raising further the non‑taxable income threshold. The budget also includes tax incentives to promote entrepreneurship and innovation. The fiscal stance is projected to be broadly neutral in 2018‑19. This is appropriate, despite strong activity, given the necessity for structural fiscal measures to address social needs and boost productivity.

Lithuania. Demand, output and prices

Statlink

Fostering inclusive growth requires additional reforms to reduce large skills mismatches by increasing the labour‑market relevance of the education system and improve the employability of low‑paid workers by lowering social security contributions and ensuring more effective activation and life‑long learning programmes. Reducing informality is key to well‑being and inclusiveness. Reforms should also focus on promoting business dynamism by widening the financing options and simplifying bankruptcy procedures. A more co‑ordinated innovation system and increased collaboration between business and research sectors would yield better innovation outcomes.

Growth will remain brisk

Supportive financial conditions and solid investment will keep activity robust in 2018‑19. Firms are projected to increase their investments in advanced technologies to offset the impact of the declining labour force. Increased roll‑out of EU‑funded projects and solid exports will also spur investment. Tightening labour market conditions will continue supporting private consumption but constraints on labour supply will weigh on growth. Unemployment is set to fall further in the projection period, while core inflation will keep rising as wage and demand pressures persist. The outlook could be affected adversely by a lower‑than‑expected growth in the euro area, while Brexit may lower emigrants’ remittances. Declining labour supply could dent employment growth more than anticipated, and unit labour costs could grow faster, impacting competitiveness. On the upside, structural reforms in key areas such as labour and education, could lead to stronger productivity and growth.