The Ministry of Finance: This Year the Lithuanian Economy Is Stronger than Expected, Next Year Growth Will Remain Positive
This year, the growth of the Lithuanian economy will be faster than previously predicted and will reach 2.4 %. The Economic Development Scenario of the Ministry of Finance projects that next year, economic development will be slower, but will remain positive – 0.7 %. Inflation, which reached 18.9 % this year, next year will slow down significantly and will reach 9.4 %.
"In the near future, the Lithuanian economy will continue to face the negative consequences of Russia's war against Ukraine, but it is expected that the country's economy will remain on the path of growth. This year, the economy will grow faster than we thought in autumn – 2.4 %. In the coming years, the growth rate will be slower as the external environment deteriorates, but will remain positive. The decisions made by the budget for 2023, supporting the purchasing power of the population and amortizing the impact of the energy price shock on both households and businesses also contribute to this," noted Minister of Finance Gintarė Skaistė. “At the same time, we are observing positive phenomena in the inflation curve, price growth pressure is decreasing for the second month in a row, which means that, according to experts, the peak of inflation has probably been reached. Average annual inflation, which reached 18.9 % this year, in 2023, it is expected to return to single-digit territory and slow to 9.4 %, of course, if we don't see new shocks in the energy and raw materials markets."
The Economic Development Scenario by the Ministry of Finance projects that the gross domestic product (GDP) of Lithuania could grow by 2.4 % per year in 2022, 0.7 % in 2023, and 3 % in 2024-2025.
The unemployment rate, which reached 7.1 % last year, will decrease to 5.9 % in 2022, and the number of employed population will increase by 4.3 %. In the third quarter of this year, the number of employed residents significantly exceeded the pre-pandemic level (1.38 million in 2019) and reached 1.45 million. It is projected that due to the slowdown in economic growth, the number of employed population will decrease by 0.7 % in 2023, and the unemployment rate will reach 7 %. In the subsequent years of the medium period, as economic activity recovers, it will decrease and will amount to 6.5 % at the end of the period.
This year, the growth of the average wage (AW) will be stimulated by the strong demand for qualified workers, their shortage, the decisions made by the Government regarding the salaries of public sector staff, the significantly increased (13.7 % to EUR 730) minimum monthly wage (MMW). In the coming years, the essential factors promoting the growth of AW will remain the same as in 2022, but as economic activity slows down, the acceleration of wage growth will fade somewhat. It is expected that the growth rate of wages in the country will reach 13 % this year, and 9.1 % in 2023.
The scenario projects that the pressure on prices should gradually weaken in 2023 due to deterioration in the labour market, worse consumer sentiment, and expected lower oil prices. On the other hand, significantly increasing wages will increase labour costs in contact work-intensive sectors (catering, accommodation, transport), so in the coming years, service inflation will remain close to this year's pace. The average annual inflation in 2022 will be 18.9 %, and in 2023 the rate of inflation will slow down to 9.4 %. In 2024-2025, assuming that the prices of energy raw materials will remain stable, the inflation rate should approach 2 %. In the medium term, the essential risk factors for inflation will remain the uncertainty of the course and consequences of the war in Ukraine, the evolution of gas and electricity, as well as oil prices.
Although the purchasing power of households is decreasing this year due to rapidly rising prices, the income of residents continues to grow, i.e. AW, MMW, NTA, old-age, benefits and state pensions are increasing. It is estimated that household consumption expenditure could grow by 1.4 % this year. In 2023, with prices growing faster than the AW, household consumption expenditure will grow slowly and reach 0.8 %. In the remaining years of the medium term, as inflation subsides and income continues to increase, the purchasing power of the population will strengthen and household consumption expenditure (in 2024-2025) could grow by 3.4 % per year.
The extremely volatile situation in the energy resource markets, increased prices and rising operating costs will lead to the abandonment of some investment projects, although the need to increase operational efficiency and invest in alternative energy sources is even stronger during this period. It is projected that the investment process in the country will be subdued for the next couple of years. In 2022, expenses for the gross fixed capital formation will grow more slowly than last year - 2.1 % (in 2021, the growth rate was 7.8 %), in 2023 - 3 %, and the expenses for the gross fixed capital formation in 2023-2025 could be higher by 5.4 % per year on average. The main factors determining the development of investments will be the continuing lack of suitably qualified employees, the need to maintain competitiveness and reduce dependence on fossil fuels, the investment policy implemented by the public sector, including funds from the European Union Funds and the Recovery and Resilience Facility.
The scenario foresees that in 2022, the exports of goods and services at constant prices could grow by 11.3 %, after assessing the developed trends in the exporst of goods and services, the changed technical assumptions due to the external environment. In 2023, the growth rate of exports of goods and services will slow down to 0.7 %, as foreign trade will be negatively affected by subdued demand and ongoing geopolitical tensions. However, in the following years, if the Lithuanian exporters manage to adapt to the changes taking place in the markets and if the activity in the external environment increases somewhat, they could grow by 3.7 % per year.
The Economic Development Scenario was drawn up in the context of an exceptional increase in instability of the external environment, ongoing vigorous military actions in Ukraine. The increased economic uncertainty due to geopolitical tensions in Europe caused by Russia’s war against Ukraine, increased long-term inflation risks, financial market tensions and uncertainty about the prospects of the global economy are key negative risk factors that may lead to changes in estimates of key indicators in this scenario. The magnitude of negative economic consequences for Lithuania will depend on how long the military actions in Ukraine will take and how the EU countries will be able to cope with energy challenges. The challenges posed by new strains of the COVID-19 virus also remain among the negative risk factors.
If unfavourable circumstances arise, the change in Lithuania's GDP may be at least by 1 percentage point lower in 2023 as compared to the estimates provided for in this Scenario, and inflation may be aby bout 3 percentage points higher.
The Lithuanian Economic Review (December 2022) is available here.
Full Economic Development Scenario for 2022–2025 is available here.
Presentation is available here.
Additional information:
The Economic Development Scenario has been updated after evaluating the revised national accounts data, the actual development of the Lithuanian economy during the nine months of 2022, the measures provided for in the Republic of Lithuania Law on the Approval of the Financial Indicators of the State Budget and Municipal Budgets for 2023, the changes in monetary policy and the external environment that occurred after the scenario published by the Ministry of Finance in September 2022. The assumptions of the scenario regarding the external environment are in line with the economic forecast published by the European Commission in November this year.
The Economic Development Scenario was prepared based on the information made public by December 1, inclusive.
Last updated: 13-02-2023
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