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19-03-2024

G. Skaistė: "This year inflation will be decreasing faster than projected"

After a mild economic slowdown last year, in 2024, a 1.6 % economic development of the country is projected. The rapid decline in inflation will continue, this year price growth will reach 1.9 %. The unemployment rate will decrease to 6.7 % this year, and wages will grow by 8.6 %, and will significantly exceed the rate of price growth. This is foreseen in the updated Economic Development Scenario by the Ministry of Finance.

"The Lithuanian economy will return to the path of growth this year. The updated projections show that inflation will be declining faster this year than projected at the end of the previous year and is likely to fall below the 2 % limit. The labour market will remain resilient, we do not expect an increase in the unemployment rate. In the meantime, wages will continue to grow at a relatively fast pace and significantly exceed inflation, which will increase the purchasing power of households and encourage consumption," says Minister of Finance Gintarė Skaistė.

The Economic Development Scenario prepared by the Ministry of Finance projects that after the decline last year, in 2024 with stronger demand in domestic and foreign markets, Lithuania's gross domestic product (GDP) will recover, the growth rate could reach 1.6 %, and in 2025-2027 accelerate to 2.9 % on average per year.

Despite a slight increase in unemployment last year, the number of employed population in the country increased by 1.4 %, while the supply of vacant jobs remained high. With the recovery of economic activity, the labour demand is expected to remain strong, so the number of employed population in 2024 will increase by 0.5 %, and the unemployment rate will decrease to 6.7 %.

The scenario projects that wage growth this year will be more moderate than last year, but will remain sufficiently fast and will amount to 8.6 %. In the subsequent years of the medium term (2025-2027), average wages could grow by 5 % per year.

Both this year and next year, wage growth will significantly exceed the rate of price growth. It is expected that in 2024 the rate of inflation will decrease faster than expected at the end of the previous year and will amount to 1.9 %. Lower inflation will be determined by the currently prevailing favourable and relatively stable situation in the markets of energy and food raw materials, more favourable trends in the prices of non-energy imported goods, assumptions of the prices of energy raw materials. The inflation rate should remain close to 2 % in the later years of the medium term.

As household disposable income continues to grow and inflation declines, the purchasing power of the population will continue to strengthen. This year, household consumption expenditure could grow by 3.1 %. In the subsequent years of the medium term (2025-2027), as the financial situation of the population continues to improve, household consumption expenditure could grow somewhat faster, by 3.4 % every year.

Investments in Lithuania grew by 10.6 % last year. Investments in construction projects and productive investments contributed significantly to the change in gross fixed capital formation (GFCF). Investments in other buildings and structures contributed the most to the double-digit growth rate of GFCF, the development of which is usually greatly influenced by the implementation of projects financed by EU funds. With the tight monetary policy of the ECB remaining, in 2024 a more moderate growth of investments is expected, expenditure on GFCF could grow by 3.5 %. In the subsequent years of the medium term (2025-2027), after successfully adapting to changes in financing conditions, in the presence of a more stable external environment, while the need to increase energy efficiency and to solve the issue of tension in the labour market remains, the growth rate of GFCF expenditure could accelerate to 5.4 %.

The scenario projects that a more favourable development of the economies of the main trade partners will lead to a moderate recovery of exports. It is projected that in 2024 the annual change in the exports of goods and services (at constant prices) will reach 3.5 %. Anticipating faster growth of foreign demand in the later years of the medium term, it is likely that in 2025-2027 the annual growth of this indicator could reach 5.2 %.

The scenario is set against the backdrop of exceptionally high external environmental instability and economic uncertainty, ongoing active military actions in Ukraine and geopolitical tensions and a tightening of monetary policy.

russia's war against Ukraine, geopolitical tensions in the Middle East, excessive tightening of monetary policy, faster growth of energy and other raw materials, food prices, less favourable development of the euro area and the global economy, fluctuations in global financial markets, population aging and lack of workers are some of the negative risk factors, which may lead to changes in the estimates of key indicators in this scenario.

There are also positive risks, such as stronger domestic and foreign demand, fiscal policies that promote economic growth, increased investment in weapons systems, faster implementation of the European Green Deal and other EU-funded projects, more favourable demographic trends and immigration of skilled workers, faster transition to green energy.

The description of Lithuania’s Economic Development Scenario (March 2024) is available here.

Full Economic Development Scenario for 2024–2027 is available here.

Presentation is available here.

 

Additional information:

The Economic Development Scenario was prepared after evaluating the data of the National Accounts for 2023 and other statistical data published by 1 March 2024, taking into account the measures provided for in the Republic of Lithuania Law on the Approval of the Financial Indicators of the 2024 State Budget and Municipal Budgets, changes in the external environment that took place after the publication of the scenario by the Ministry of Finance in December 2023. The assumptions of the scenario regarding the external environment and energy (oil and natural gas) prices are in line with the economic forecast published by the European Commission in February this year.