Lithuania

major macro economic indicators

(e): Estimate (f): Forecast

RISK ASSESSMENT

Further growth progress after a rocky start to the year

While Lithuania exited the COVID-19 induced recession in early 2021, the pandemic has remained an issue for further economic development. Although the vaccination-campaign made good progress, this could not prevent further big COVID-19 waves from happening in autumn/winter 2021. After a relatively strong growth momentum, especially at the beginning of 2021 and in the summer, the new wave should have particularly dampened private consumption (61% of GDP) at the turn of the year. Furthermore, high inflation, which reduces purchasing power, is another factor that negatively affects private consumption. The inflation rate could have reached its peak at around 11% in early 2022, as both individual goods and energy prices became more expensive. Households’ heating bills are expected to increase by 50% to 60% above the average of the last years during the winter months. However, inflation should in some part drop over the year 2022, as the price-pressure coming from global supply-chain disruptions and other special events should decrease slowly. Moreover, the labour market should further strengthen and the unemployment rate could retreat to pre-COVID-19 levels by the end of Q1 2022. Finally, on average, wages should grow by around 8% over 2021 according to the central bank and, therefore, increase the purchasing power from early summer onwards. While exports should improve slightly in 2022, they are still very dependent on the pandemic’s development in their main destinations, Russia and Latvia (together 23% of total exports), where bigger COVID-19 waves occurred in late 2021. As Lithuania is a small, open economy, imports should increase more than exports, thanks to the domestic recovery, and net foreign trade will have a negative effect on economic growth. Positive impulse should come from public consumption and investments. After the end of additional state support measures for companies in late 2021, there are still EUR 304 million (0.7% of GDP) reserved to deal with the pandemic in 2022. Moreover, national defence expenditures should increase by 12.2% to a total of EUR 1.176 billion. (2.05% of GDP), due to the tense situation with Belarus and Russia. Within the EU’s Recovery Fund (NextGenerationEU) EUR 2.2 billion in grants (4.5% of GDP) are reserved for Lithuania between 2021 and 2026. In the second half of 2021, the first tranche (13% of all grants) of the early-approved plan already went to Lithuania, so that investment programs into green energy and education could already start during winter. The ECB will buy its assets in a total envelope of EUR 1850 billion until the end of March 2022. All maturing bonds of this envelope will be reinvested until the end of 2023. Besides, net purchases under the normal asset purchase programme will continue.

Budget remains solicited, the current account is normalizing

The termination of major public stimuli programs combined with higher defence expenditures will result in a slowly decreasing but still high public deficit in 2022. This will not suffice to stop the widening of the public debt, which will reach a historical record level. Nevertheless, with a share of around 53% of GDP, it remains below the Maastricht-criteria. The current account surplus rose dramatically in 2020, but will fall back to its 2019 level in 2022 due to the normalization of the trade balance in the wake of reviving domestic demand, while the services balance and the income balance (e.g. capital income) will probably not show major changes compared to 2021. 

Stable coalition despite some headwinds

Since October 2020, Prime Minister Ingrida Šimonytė of the conservative party “Homeland Union” (50 out of 141 seats in the parliament) is leading a coalition together with the Liberal Movement (12 seats) and the Freedom Party (11 seats). Despite several political problems and declining public support (especially for the Homeland Union) in late 2021, the coalition seems durable. One problem has derived from a noticeable group of COVID-19 deniers, who protested violently in summer 2021 against the introduction of a digital COVID-vaccination pass that allowed the decrease of restrictions for vaccinated, recovered or tested persons, but led to tighter restrictions for all of those without the COVID-pass. In addition, Lithuania was confronted with a strong influx of migrants coming from Belarus in autumn 2021, which was encouraged by the Belarussian government to pressure the EU. This helped some national-conservative parties, although the Lithuanian government announced it would build a fence at the border. Besides that, Lithuania started working on its diplomatic relationship with Taiwan in 2021, which resulted into rising tensions with China. It is expected that the current government will retain power until the next parliamentary election in October 2024. 

Last updated: February 2022