After stagnating in 2023, GDP is projected to increase by 2.4% in 2024, 3.1% in 2025 and 2.8% in 2026. Strong real wage gains, especially until mid-2025, will support a pickup in private consumption, and exports will continue to increase along with demand from Lithuania’s main trading partners. The main risks to the outlook are related to economic activity in the euro area, global energy prices and geopolitical tensions.

Fiscal policy is expected to tighten slowly over 2025-26, but more could be done to prepare for emerging spending needs by increasing spending efficiency and property tax revenues, and limiting informal economic activity. Encouraging immigration at all skill levels and increasing the employability of younger and older workers would help alleviate labour shortages. Developing domestic capital markets, increasing R&D spending, and improving digital skills would help support productivity growth and sustain living standards despite population ageing.

GDP growth has been gaining momentum since mid-2023, supported by declining inflation and stronger exports. While core inflation was 2.2% in October 2024, headline inflation has stayed at or below 1.1% since the beginning of 2024 amid falling energy prices. The labour market is tight, with vacancies at a historically high level, especially in ICT, finance, trade and accommodation, and professional and administrative services. This contributes to strong nominal wage growth, above 10% year-on-year in 2024Q2. In this context, consumer confidence is high, but business confidence remains subdued.

Global oil and food prices are expected to remain lower over 2024-26 than over 2022-23, thus allowing disinflation to continue. Export market growth has regained momentum and is expected to continue at the same pace as in mid-2024 over 2025-26.

Financial conditions are improving as interest rate spreads vis-à-vis Germany are expected to stabilise slightly above 1 percentage point (pp) in 2025-26, down from 2.2pp in late 2022. The headline fiscal deficit is expected to increase from 0.7% in 2023 to 1.8% in 2024, 1.6% in 2025 and 1.3% in 2026, mainly related to pension benefit and public wage growth. The significant increase in pensions is due to recent measures to limit old-age poverty amid high inflation. Public wage growth is expected to ease in the future, in line with private wage growth. Adjusting for the cycle and interest payments, the fiscal stance is slowly tightening and will be mildly restrictive in 2026. The inflow of RRP funds is expected to increase in 2025 before slowing in 2026.

GDP is projected to increase by 2.4% in 2024, 3.1% in 2025 and 2.8% in 2026. Sustained real wage gains and increasing consumer confidence are expected to support a pickup in household consumption. Investment is declining in 2024 after an exceptionally strong 2023, and amid low capacity utilisation and subdued business confidence, but it will gain momentum over 2025-26. Exports will continue to rise along with demand from Lithuania’s main trading partners. While Lithuania has been able to stop all imports of oil, gas and electricity from Russia in early 2022 and renewable energy sources are expanding at a rapid pace, the economy is vulnerable to fluctuations in global energy prices. Lower-than-expected growth in the rest of the euro area, which represents over 40% of Lithuania’s exports, would also harm domestic growth.

Lithuania will face a major demographic shock that will weigh on potential growth and competitiveness. Consolidating the recent reversal in migration by encouraging the return of Lithuanians living abroad and attracting foreign workers of all skill levels will be key to alleviate labour shortages. Extending the standard duration and flexibility of residence permits for non-EU migrants meeting certain qualification, experience and integration criteria would increase the attractiveness of Lithuania. There is also room to support the employability of younger workers by reforming vocational education, and of older workers by improving health conditions. Improving health outcomes in a cost-effective way will require further rationalising the hospital network, addressing healthcare staff shortages, and promoting healthier lifestyles. The expected demographic change will also increase pension-related costs, with high old-age poverty and low life expectancy for men making it difficult to contain them. In this context, building additional fiscal space will be key to ensure fiscal sustainability. This will require increasing the efficiency of public spending and property tax revenues, and encouraging formal economic activity. Strengthening productivity growth will be key to sustain living standards despite population ageing. Possible avenues to do so include developing domestic capital markets, increasing R&D spending, and improving digital skills.