Chief Economist of Šiaulių Bankas I. Genytė-Pikčienė: Lithuania's economy is picking up speed

• Lithuania's economic growth this year is among the fastest in the EU
• Lithuania has the lowest inflation, fast wage growth and highest consumer expectations in the EU
• Lithuania's GDP is expected to expand by 2% this year, with an average unemployment rate of 7.2%, gross wage growth of 9.5% and average annual inflation of 0.9%.
• Projections for 2025: GDP growth of 2.7%, average unemployment of 6.5%, wage growth of 8.7%, average annual inflation of 2.3%.

After a mild recession last year, Lithuania started the year with one of the fastest economic growth rates in the European Union (EU). In addition, Lithuania is distinguished by the lowest annual inflation, one of the fastest wage growth rates and the highest consumer expectations for some time now," said Indrė Genytė-Pikčienė, Chief Economist of Šiaulių Bankas, presenting the outlook for Lithuania and the global economy.

"The Lithuanian economy met the recent difficult period well-prepared. This was due to the low level of indebtedness of households and businesses, the successful post-pandemic expansion years that helped economic agents to build up financial reserves, and the timely arrival of more investment from the European Union's Structural Funds.

For these reasons, even in the face of high interest rates and sluggish external demand, firms have not cut production capacity or reduced their workforce in order to be ready to respond flexibly and quickly to a recovery in export demand.

Consumers have also weathered the inflation shock without radical changes in consumption behaviour. Accumulated financial reserves, rising incomes and high responsible lending standards helped households to successfully withstand the pressure of both inflation and high interest rates," says Šiaulių bankas' Chief Economist.

GDP growth will reach 2% this year and accelerate to 2.7% next year.

I. Genytė-Pikčienė suggests that a strong start to the year demonstrates the resilience of both businesses and households, and forecasts that macroeconomic conditions will only improve as the year progresses.

Manufacturing, which experienced a significant decline last year, is already showing increasingly positive signs. The energy-intensive chemical industry has recovered, warehouses are being restocked, and the furniture and wood industries are gearing up for a new growth cycle.

Industry expectations are also slowly improving, with labour demand recovering, new inventories being built up and preparations being made for a recovery in export market demand.

"The vanished inflation, a dynamic labour market and rapid wage growth have already allowed purchasing power to recover. As a result, household consumption growth should soon pick up, and as Europe sees lower interest rates, private investment will become bolder in the autumn and export growth will strengthen. For these reasons, Lithuania's GDP is expected to expand by 2% this year and accelerate to 2.7% next year," predicts Šiaulių Bankas Chief Economist Indrė Genytė-Pikčienė.

The labour market remains dynamic - according to Šiaulių Bankas' forecasts, the average unemployment rate will be 7.2% this year and 6.5% next year.

Reviewing labour market trends, the economist of Šiaulių Bankas points to the significant impact of international migration. A positive balance of international migration can be observed for the sixth consecutive year. The Lithuanian economy has successfully managed to absorb the increased supply of workers, and immigration flows have even helped to mask some long-standing structural labour market imbalances.

"According to the Employment Service, the number of registered unemployed per month in January-March remained stable and broadly in line with the five-year average. Moreover, Lithuania has not seen such a high level of employment in recent quarters since before the Great Recession of 2009," says I. Genytė-Pikčienė.

However, the more passive demand from employers suggests that the labour market is going through a sluggish phase of the business cycle. Since September 2022, the number of new job registrations per month has been lower than the number of new registered unemployed, and in January-March the average number of new job registrations per month was 1.5 times lower than the five-year average.

Although the first half of this year has not been easy for companies due to high interest rates, sluggish demand and the impact of the inflationary low-tide on incomes, wage growth remains strong.

Average gross wages will increase by 9.5% per year this year and by 8.7% in 2025.

"Wage growth this year is driven by last year's decisions to raise the monthly minimum wage by ten per cent from the start of the year and to improve pay for public sector workers. This is an election year, so political decisions on income growth are likely to be equally generous next year.  

Although Lithuania is still well behind the euro area average in terms of average wages, the ratio of total wage bill to GDP has been above it for some time. It is not sustainable if wages are growing much faster than labour productivity," notes Šiaulių bankas' Chief Economist.

Šiaulių Bankas forecasts that average annual inflation will reach 0.9% this year and rise to 2.3% next year.

The base effect of high consumer price index last year, created by the energy crisis and the inflation shock, results in very low current annual inflation rates.

The price indices of energy and other commodities have been decreasing for some time now, with only rising prices of services keeping inflation going. While wage growth has not lost momentum, inflation in services remains relatively high, as labour costs account for a significant part of their pricing.

"Inflation will remain subdued in the first half of the year, but may recover somewhat in the autumn, when interest rate cuts are likely to boost the expansion of the world's industrial centres and the appetite for commodities, as well as to give a boost to consumers in mature economies," notes I. Genytė-Pikčienė.

Contact:

Indrė Genytė-Pikčienė
Chief Economist, Šiaulių bankas
Mob. +370 620 78 373
[email protected]