Economic studies
Lithuania

Lithuania

Population 2.8 million
GDP 19,482 US$
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Synthesis

major macro economic indicators

  2018 2019 2020 (e) 2021 (f)
GDP growth (%) 3.9 4.3 -1.3 2.8
Inflation (yearly average, %) 2.7 2.3 1.2 1.0
Budget balance (% GDP) 0.6 0.3 -8.4 -5.0
Current account balance (% GDP) 0.3 3.3 6.8 4.1
Public debt (% GDP) 33.7 35.9 46.8 49.2

(e): Estimate (f): Forecast

STRENGTHS

  • Membership of the Eurozone since 2015 and the OECD since 2018
  • Sound public and external accounts
  • Banking system dominated by three Scandinavian institutions
  • Transit zone between the European Union and Russia / Kaliningrad enclave
  • Diversification of energy supply (Klaipeda gas terminal, shale gas potential, electricity links with Poland and Sweden)
  • Rising FinTech sector

WEAKNESSES

  • Tight labour market: shrinking workforce (emigration of skilled young people) and high structural unemployment
  • Large informal economy (26% of GDP)
  • High income disparity between the capital and the regions, particularly in the northeast where poverty persists
  • Limited value added of exports (mineral products, wood, agri-food, furniture, electrical equipment)
  • Competitiveness eroded by insufficient productivity gains  

RISK ASSESSMENT

Recovery after a relatively modest recession

The economic outlook for 2021 is characterized by the recovery following the COVID-19 pandemic induced recession in 2020. After COVID-19 first hit Lithuania in spring, the government reacted fast with a nationwide lockdown for 6 weeks, with all non-essential shops and services closing and public life coming to a standstill. These measures helped to contain the number of COVID-19 cases in a very modest area. A second wave that started in early autumn of 2020 turned out much stronger, and resulted in another lockdown (starting in October 2020 until at least early 2021), again with severe restrictions (e.g. closed shops). While the restrictive measures in Lithuania were similar to other European countries in spring 2020 (e.g. Germany), the economic damage was significantly lower. In the first half of 2020, GDP fell only by 1.2% compared to the same period in 2019, which was the second best result in the EU after Ireland. A strong production in the important food industry and in pharmaceuticals helped to stabilize economic growth. After a dynamic economic recovery in the summer of 2020 and another setback in economic activity in late 2020, because of the second lockdown, GDP growth in 2021 should be positive, but muted. It will depend on the development of the pandemic/the vaccination campaign, as well as the economic performance of the main export destinations: Russia, Poland and Latvia (which together account for 31% of all exports). Private consumption should remain one of the main drivers of economic growth, as the unemployment rate will slowly descend from its 2020 highs to lower but still elevated levels in 2021. Wage growth should be accordingly lower in 2021 (around 3.3% after 6.5% in 2020). Growth support will probably also come from the fiscal stimuli that were already decided in 2020 and that are particularly concentrated on investments. In 2020, the government decided an additional budget of EUR 3.5 billion (7% of GDP) in order to support the health sector and to provide wage subsidies for employees. Moreover, guarantee schemes were expanded (EUR 1.3 billion, 2.6% of GDP) and a business support fund was introduced (EUR 1 billion, 2.1% of GDP). Besides this, an investment plan worth of EUR 6.3 billion (13% of GDP) was approved (EUR 2.2 billion are new, the rest was accelerated) to invest, for instance, into infrastructure and digitalization through the end of 2021. Additional support will come from the ECB, which extended its asset purchases by EUR 500 bn. up to EUR 1850 bn., so that it has enough liquidity to buy assets in an unchanged manner until the end of March 2022. Further T-LTROS for an unchanged high credit supply are in the pipeline, too.

 

Public debt and the current account surplus reach record highs

The stimuli programs had a price. After four consecutive years of surpluses, the public budget went into a strong deficit in 2020. The additional investment measures in 2021 will lead into another strong deficit (comparable in size with the deficit of 2010). Therefore, pubic debt will increase to almost 50% of GDP, a record in Lithuanian history. The current account surplus has surprisingly reached a record high in 2020. The structural goods trade deficit decreased noticeably, as imports fell stronger than exports, while the services balance remained in surplus and the structural deficit of the income balance (e.g. capital income) decreased. In 2021, the deficit of the trade balance should increase again somewhat with a stronger recovery of domestic demand, but the current account surplus will probably remain relatively high.

 

New Prime Minister elected to fight the recession

Former Finance Minister and opposition politician Ingrida Šimonytė won, for the conservative party “Homeland Union”, the parliamentary elections in October 2020. The party holds now 50 of the 141 seats in parliament. The victory reflected the public support for a comeback of Šimonytė’s austerity policy, which she worked on from 2009 to 2012 when she dealt with the repercussions of the financial market crisis and stabilized public finances via harsh cutbacks. The Farmer and Greens-party of the former Prime Minister Saulius Skvernelis, which lost 22 seats and reached 32 seats, came second in the general election. The new Prime Minister Šimonytė formed a coalition with the Liberal Movement (12 seats) and the Freedom Party (11 seats). Together, they have a small majority of 73 seats. The next parliamentary election should take place in October 2024.

 

Last updated: March 2021

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