OECD Economic Outlook, Volume 2023 Issue 2

Lithuania

The economy is projected to contract in 2023 by 0.4%, before growing by 1.7% in 2024 and 3.1% in 2025. Although inflationary pressures and supply chain disruptions are receding, higher than expected oil prices have slowed the decline of inflation and will lead to a contraction in private consumption in 2023. Uncertainty and geopolitical tensions will weaken demand in key trading partners and contribute to a slowdown in exports. Public investment, strengthened by EU funds, will support growth. The labour market remains tight with robust wage growth and shortages of high-skilled workers.

Fiscal policy support is helping households and firms with elevated energy costs. Better targeting to vulnerable groups could make this more efficient. Unwinding state support of industry would alleviate some fiscal pressure. Improving participation in lifelong education would help to increase digital skills and help older workers to enter high-growth industries. More targeted support for innovation, particularly for low‑carbon technology adoption, would help to tackle hard-to-abate emissions in transport and industry.

Manufacturing is slowing but consumer confidence is recovering

The economy slowed in the first half of 2023 as the impact of uncertainty from geopolitical tensions, rising interest rates and deteriorating business confidence weighed on activity. GDP also declined marginally in the third quarter of 2023. Industrial confidence has been negative for 17 consecutive months recording its lowest levels since the pandemic. Manufacturing production, retail sales and exports have contracted in recent months. However, consumer confidence is recovering, unemployment remains low, wage growth is robust, and inflation has eased to 3.1% in October. These factors lay the grounds for a rebound in private consumption.

Lithuania: Activity and confidence indicators

Source: OECD Main Economic Indicators database; and European Commission business and consumer surveys.

Statlink

Lithuania: Demand, output and prices

Statlink

Russia’s war of aggression against Ukraine has continued to have a sizeable impact on the economy. Temporary measures related to assistance for displaced people from Ukraine and energy price support for household and firms have added to public expenditure. As of September 2023, over 72,000 Ukrainian refugees had registered for temporary protection. Persistently high inflation and slowing growth in the euro area have curbed external demand and led to a contraction in exports and manufacturing production.

Fiscal policy is supportive in 2023 but will tighten in 2024-25

Tighter monetary conditions are cooling the housing market and building permits have declined sharply during the first half of 2023. Countercyclical fiscal policy in 2023 implies an increase in the structural deficit, partly owing to temporary spending items worth 1.9% of GDP related to the war in Ukraine. Natural gas price compensation for households has been extended to the end of 2023, but subsidies for electricity have been discontinued. Support will continue for the state railway company which is experiencing losses due to sanctions on Russia and Belarus. Lower-than-expected refugee arrivals and lower costs of acquiring military equipment have allowed some fiscal savings and by 2024-25, large-scale measures supporting households and firms will no longer be needed. The general government budget deficit is expected to fall in 2025, after having risen in 2023 and 2024. Government debt will increase over 2023-2025. The cost of pensions and healthcare are projected to increase by 0.8% and 0.4% of GDP by 2030 due to demographic pressures. Investment will be boosted by implementation of the EU Recovery and Resilience Plan (RRP).

Growth will pick up progressively, restrained by weak exports

After a projected decline in GDP in 2023, due to persistently weak demand in key export markets and lower consumer spending, GDP growth is expected to resume in 2024 and 2025. Strong real wage growth will support a rebound in private consumption. Public investment will increase with the progressive deployment of EU Recovery and Resilience funds, but private investment will continue to be weighed down by a weak housing market. Export growth is expected to strengthen in 2025 as export markets begin to recover. Lithuania risks losing part of the RRP funding if a real estate bill is not passed or not properly implemented. Stronger than expected wage growth could undermine export competitiveness and push up inflation. On the upside, strong wage growth, coupled with rapidly falling inflation, could support a more forceful rebound in private consumption.

Securing stronger and more sustainable growth

A general unwinding and stronger targeting of energy price support would reduce fiscal exposure to energy price movements and help rebuild fiscal space. There is a sizeable productivity gap between small and large firms, which could be narrowed with greater use of digital technologies. Promoting higher participation in lifelong education would be one way to achieve this, and could also make growth more inclusive. Reaching emission reduction targets, especially in hard-to-abate sectors like transport and industry, will require a greater role for technology diffusion, helped by more targeted support for innovation and technology adoption.