OECD Economic Outlook, Volume 2024 Issue 1

Lithuania

After a mild contraction in 2023, growth is projected to rebound to 1.7% in 2024 and 3.1% in 2025. Investment will be a key driver of growth, supported by the roll-out of EU funds. Consumption will be buoyed by strong real wage growth amid falling inflation, while unemployment is projected to decline slowly. Exports will recover gradually from a sharp slowdown as external demand from trading partners gathers pace.

Future pressures on debt sustainability will come from an ageing population and a shrinking labour force. Financing future pension and healthcare costs will require additional fiscal resources. Increasing tax progressivity would also help to reduce income inequality. Boosting productivity and growth will require stronger investments in research and development. A stronger commitment to digital skills development and life-long education would allow more workers to engage with the fastest growing sectors of the economy. Reaching emission targets will require stronger price signals and more targeted support, such as subsidies for technology adoption, especially in hard-to-abate sectors like transport and industry.

Declining exports are weighing on economic activity

GDP growth stalled in the second half of 2023, and declined by 0.3% in 2023 as a whole, driven by declining exports. Only investment, fuelled by EU funds, supported economic activity. Business confidence is slowly rebounding, especially in industry but remains at a low level. While the unemployment rate increased from 6.3% at the end of 2022 to 7.4% in February 2024, it remains below its average over the last decade. After peaking at 22.5% in September 2022, inflation declined steadily to 0.4% in March 2024. After a decline in 2022, real wage growth rose in 2023, contributing to a strong increase in consumer confidence through 2023.

Russia’s war of aggression against Ukraine continues to impact the economy. Additional expenditure related to the war has come primarily from temporary measures related to the assistance of displaced people from Ukraine and increased defence spending. Up to February 2024, over 75,000 Ukrainian refugees have registered for temporary protection. Low growth in European trading partners has hit demand for consumer goods and contributed to the contraction in exports in 2023.

Lithuania: Trade and confidence indicators

Source: OECD Economic Outlook 115 database; and European Commission business and consumer surveys.

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Lithuania: Demand, output and prices

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Energy price falls will ease fiscal pressures

The government will implement a countercyclical fiscal policy in response to the war in Ukraine with an increase in the deficit in 2024 to 2.8% of GDP. This temporary increase comes on the back of a much lower than expected deficit in 2023 of 0.8% of GDP, due to lower than expected energy prices. The deficit is then projected to decrease to 2.3% of GDP in 2025. Temporary measures include support for Ukrainian refugees, payment of financial obligations to the IMF on behalf of Ukraine, as well as contributions as part of the G7 Joint Declaration of Support for Ukraine. The 2024 budget no longer contains an allocation for energy price support measures. Investment will be driven by the implementation of projects financed by EU Funds and the Recovery and Resilience plan. Defence spending will be maintained at 2.5% of GDP. A mild tightening of the fiscal stance is projected in 2025. The pass-through of monetary policy to financing costs has increased the interest rate on mortgages by 1.2 percentage points in the year to January 2024.

Growth is expected to rebound

GDP growth is expected to recover in 2024 and 2025, driven by a rebound in private consumption, strong wage growth, a continued decline in inflation and a pick-up in exports as demand from European trading partners recovers. Inflation has eased due to a stabilisation in external price pressures, principally from oil and food. While investment is expected to moderate after the exceptional growth in 2023, it will continue to support GDP growth in 2024 and 2025. Nevertheless, investment may be negatively impacted if EU Recovery and Resilience Funds (RRF) disbursements are lower than expected. Part of the RRF funding for Lithuania depends on the adoption of a real-estate taxation reform for which a political consensus has yet to emerge, and there is also uncertainty regarding the share of RRF funding that will be linked to the adoption of this reform. Moreover, strong wage growth combined with labour shortages may negatively impact the exporting sector. Heightened geopolitical tensions could also curb export prospects and raise import prices.

Reforms are required to secure stronger and more sustainable growth

Fiscal policy is prudently managed but facing spending pressures related to population ageing. Since old‑age poverty is high and life expectancy for men reaching retirement age is low, there is limited scope to cut pensions or further increase the retirement age. Additional resources will be needed to finance future pension and healthcare costs. Encouraging more people to work in the formal economy, reducing the large VAT gap, and increasing immovable property taxation would help to achieve this objective. There is also room to increase the progressivity of the tax system to limit income inequality. Strengthening productivity is the key to enhancing growth. Currently the take-up of R&D tax incentives for businesses is low, despite generous provisions. A shift to support through a combination of tax incentives and direct support could improve engagement and innovation. A timely roll‑out of digital skills programmes in schools and universities would enable more workers to enter high‑productivity sectors. Current climate change mitigation policies rely primarily on a range of costly subsidies, for electric cars and renewable energy, with carbon prices still broadly below the levels needed to reduce the carbon intensity of economic activity. Reaching emission targets will require enhancing price signals, and targeted support for innovation and technology adoption, especially in hard‑to‑abate sectors like transport and industry.