The Ministry of Finance: a soft economic landing is expected this year, with a return to growth next year

The Economic Development Scenario updated by the Ministry of Finance projects a soft landing of the Lithuanian economy this year, with a return to economic growth next year. It is projected that the country's economy will shrink by 0.4 % in 2023, and a 1.7 % economic growth can be expected next year.

"After the economic slowdown this year, a return to growth territory is expected next year. The labour market remains resilient – a strong wage growth continues, which will remain in double digits this year and will be above average annual inflation, and this will have a positive impact on the purchasing power of the population and household consumption. In 2024, it is projected that the pace of price growth will further slow and will come back to more sustainable limits," said Minister of Finance Gintarė Skaistė.

The Economic Development Scenario prepared by the Ministry of Finance projects that this year Lithuania's gross domestic product (GDP) will shrink by 0.4 %, and with the strengthening of the purchasing power of households in the domestic and foreign markets and the strengthening of foreign demand, economic recovery can be expected next year. In 2024, GDP could grow by 1.7 %, and in 2025-2026, it could accelerate to 2.9 % on average per year.

Although the tension in the labour market has eased somewhat due to the slowdown in economic activity, a significant increase in unemployment is not expected this year. The change in the number of employed population is expected to be 0.0 % this year, and the unemployment rate will reach 6.9 %. In the following years of the medium term, as economic activity recovers, the unemployment rate will begin to decrease and will reach 6.6 % in 2024, 6.4 % in 2025, and 6.3 % in 2026.

The scenario projects that wage growth will reach 12.1% this year. Next year a somewhat more moderate wage growth rate is expected, which could reach 6.5 %, and in 2025-2026 it could grow by 5 % per year.

In 2023, the average annual inflation is expected to be 9 % and not only lower energy prices, but also the normalization of global supply chains and the tightening of monetary policy will contribute to a more favourable price development than last year. In 2024, as the inflationary pressure continues to decrease, the average annual inflation is likely to decrease to 2.9 %, and from 2025, the inflation rate should come even closer to the European Central Bank's 2 %. Inflation is expected to reach 2.3-2.4 % in the later years of the medium term.

Household consumption expenditure on goods and services could grow by 0.3 % in 2023. In the medium term, as prices no longer have such a strong impact on the purchasing power of the population, and as income continues to grow, household consumption expenditure could grow faster, i.e. 3.3 % on average per year in 2024-2026.

This year, investments in Lithuania grew by 10.4 % in the first half of the year, and it was an important factor in economic development. A 13.9 % increase in investments in other buildings and structures (4.4 p.p.), the development of which is also affected by the implementation of projects financed by the European Union funds, contributed significantly to the gross fixed capital formation (GFCF). It is estimated that during the entire year 2023, the expenditure on GFCF could be by 7.5 % higher as compared to 2022. Next year the investment process in the country is likely to be slowed down by the influence of tightening monetary policy – a 3.5 % growth of GFCF expenditure is projected. In the subsequent years of the medium term, after successfully adapting to the changed financing conditions, in the presence of a more stable external environment and due to the recently strengthened need to increase operational efficiency, expenditure on the formation of GFCF could grow by 5.4 % each year.

The scenario predicts that due to changes in monetary policy and the consequences of the war in Ukraine, the global demand for exports from Lithuania will be subdued this year, and the possibilities of increasing the volume of exports will depend on the flexibility of exporting companies and the abilities to invest in technological progress and productivity-enhancing measures. It is projected that in 2023, the annual change in the exports of Lithuanian goods and services (at constant prices) will amount to –4.5 %. In the subsequent years of the medium term, after the recovery of foreign demand, on average a 4.5 %growth per year is expected.

The Economic Development Scenario was developed under conditions of still exceptionally high instability of external environment and economic uncertainty, with the ongoing global tightening of monetary policy and ongoing active military actions in Ukraine.

Escalation of the war in Ukraine and disruption of supply chains, 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 the global financial markets, population aging and shortage of employees, new outbreaks of the COVID-19 virus are the negative risk factors that may cause changes in the estimates of key indicators in this scenario.

There are also positive risks – stronger domestic and foreign demand, fiscal policy promoting economic growth, effective implementation of the plan "New Generation Lithuania" and other projects financed by the EU, better demographic trends and immigration of skilled employees, faster transition to green energy.

The full Economic Development Scenario for 2023-2026 is availablehere.

The presentation is available here.

Additional information:

The Economic Development Scenario was prepared after assessing the actual development of the Lithuanian economy during the first half of 2023, taking into account the changes in monetary policy and the external environment in the scenario announced by the Ministry of Finance in June 2023. The scenario's assumptions regarding the external environment are in line with the economic forecast published by the European Commission in May this year. Assumptions for oil and natural gas prices are consistent with oil price futures published on 21 August 2023.

The date of inclusion of statistical data and other information in the Economic Development Scenario is 31 August 2023 inclusive.