Lithuania’s economy is bubbling promisingly, Latvia’s is stagnating and Estonia’s is struggling in a prolonged downturn. Both major Lithuanian commercial banks, Swedbank and SEB, have ticked up Lithuania’s forecast for the year, boosting confidence that the economy is on the right track.
Swedbank is projecting a GDP increase of 2.2% and SEB is predicting a 2.4% rise, up from the 1.5% forecast in May. The latter bank described Lithuania’s anticipated economic growth for 2024 as “significantly exceeding expectations.”
“We can finally see the long-awaited changes in the country’s economy – the stagnated economy is showing signs of recovery. Our earlier forecast is materialising: this year we will experience a recovery, and the economic development should return to a more usual long-term pace next year,” Gediminas Simkus, Chairman of the Board of the Bank of Lithuania, the country’s central bank, said in June.
The Bank of Lithuania projects that this year Lithuania’s gross domestic product (GDP) will grow by 1.9% at least. The GDP forecast for 2025 and 2026 remains unchanged – the indicator should increase by 3.1% and 3.3% respectively.
Zygimantas Mauricas, chief economist at Luminor Bank Lithuania, says that several factors are behind the cheerful national economy. First, the current sufficiently fast economic growth prompts both consumers’ and traders’ confidence and boost further higher budget income growth.
The stability of the Lithuanian tax system, he says, increases the confidence of the population and business and allows the economy to continue to grow, so Lithuania, unlike Estonia, is in a positive circle of growing economy and stable taxes.
“Lithuania has the opportunity to remain a country with lower taxes, which would be another significant competitive advantage of Lithuania, and not only against Estonia,” Mauricas says.
Speaking of taxes, he also warns that the biggest threat to Lithuania’s economy is the popular narrative that tax increases are supposedly inevitable to increase “redistribution”, so, in a longer term, there is a threat that taxes will also go up in Lithuania. Especially with the ballooning defence sector spending.
The analyst also says in his Facebook post that there is a need to make the tax system fairer, simpler and more transparent, but unfortunately “we are moving in this direction at the speed of a turtle.”
Meanwhile, Swedbank Lithuania chief economist Nerijus Maciulis said in a press release last week that the bank was changing the economic forecasts of the Baltic countries in different directions.
“We are increasing Lithuania’s GDP forecast for this year by 0.4%, to 2.2%. This is one of the fastest growths in the region,” he said.
According to the analyst, in the whole picture, the weak link so far is the Eurozone industry.
In Germany, car production has declined to its lowest level since 2012, and the country is losing the competitive battle with China. This prolonged downturn in the industry is now leading to an increase in bankruptcies. For instance, in France, the number of bankruptcies has reached its highest point since 2009.
Maciulis emphasised the importance of the Eurozone’s economic performance, stating: “We are not significantly altering our forecast for next year. We expect the economies of the eurozone and the USA to grow at a similar rate of around 1.5%. The German economy is not yet expanding, but we anticipate it could grow by 1% next year.”
In the first seven months of this year, Lithuania’s manufacturing output increased by 3.3%, with July alone showing nearly double the annual growth rate.
However, the economist cautions that a rapid recovery in exports is unlikely, as export order levels remain below the long-term historical average.
Maculis also noted that, as expected, this year had seen a rapid increase in purchasing power, and retail trade in Lithuania was already beginning to recover.
“We are seeing an unprecedented phenomenon: Lithuania’s confidence indicators are the highest in the European Union. Particularly Lithuanian and Polish residents positively assess their personal financial prospects, Latvians’ confidence is close to the EU average, while Estonians and Greeks assess their economic prospects the worst”, the economist said.
Household consumption in Lithuania is projected to grow by 4.2% this year and by 3.2% next year, an increase from the 2.8% and 3.2% growth rates projected in May.
“Household consumption expenditure is the main driver of economic growth. In the first quarter of this year household consumption expenditure exceeded the highest level recorded before the inflation surge. It will be further supported by the continued rapid growth in household income as well as slower price increases, improving household expectations and a favourable labour market situation for workers. Following a 1.1% decline last year, consumer expenditure is projected to increase by 3.4% this year and by 3.7% both in 2025 and 2026,” the Bank of Lithuania has said recently.
According to Swedbank Lithuania’s chief economist, such confidence of Lithuanians is mostly determined by low inflation and rapidly growing wages. According to him, over the past five years, tying the minimum monthly wage (MMW) to the average wage has been effective.
This week, Lithuania’s Cabinet of Ministers decided to raise the minimum monthly wage by 114 euros, bringing it to 1,038 euros before tax.
As a result, minimum wage earners will see their disposable income increase by 69 euros, to around 777 euros per month. Additionally, the minimum hourly wage will rise by 70 cents, reaching 6.35 euros.
The analyst points out that population growth has also been a key driver of domestic demand. Over the past three years, net immigration has totalled approximately 140,000 people, or about 5% of the country’s population. However, the economist also highlighted a concerning trend: a decline in the share of GDP generated per worker.
“Precisely because the labour force has grown in recent years due to lower value-added workers, mainly immigrants, who have been employed in low-value-added sectors (transportation, accommodation, construction sector) – GDP growth continues,” the analyst said.
In the first quarter of this year, private sector investment in Lithuania was nearly 10% lower compared to the same period last year. However, Lithuania’s business loan portfolio is currently experiencing one of the fastest growth rates in the eurozone, leading economists to predict that investment growth will accelerate to 6.5% next year, driven primarily by private sector investments rather than public ones.
Lithuania’s average annual inflation is expected to slow to 1.2% this year before rising again to 3% in 2024.
While Maciulis has expressed concern that the labour market might overheat, potentially leading to higher unemployment, the unemployment rate is expected to remain stable, at 7.3% this year and 7% next year.
Meanwhile, the Lithuanian banking sector is poised for significant changes, with several new entrants expected to join the market soon-a testament to the strength of the local financial system.
Commerzbank, one of Germany’s largest banks, will open a representative office in Lithuania this December, which will serve as its hub for the three Baltic States. Additionally, Poland’s Pekao is anticipated to enter the Lithuanian market shortly.
In late July, the Bank of Taiwan announced plans to establish a unit in Lithuania, marking a significant development in the country’s banking sector. (BNN)