Lithuania’s economy is showing resilience in the aftermath of the war in Ukraine, with the Bank of Lithuania’s projection at 2.5% for 2022. The projection for GDP growth this year is revised up to 1.3%. The smooth integration of 25,000 Ukrainians, mostly war refugees, into the country’s labour market is believed also help to strengthen resilience. Can the same be told with inflation out of control?

Although the energy price shock has had a severe impact, Vilnius’ economy continues to grow. There are early signs of a relatively mild stagnation at the turn of the year. Sales in the manufacturing sector have stopped declining for three consecutive months. And, taking price effects into account, retail and construction sales have not declined significantly in recent months. The economic situation is also not showing any significant deterioration in both business or household confidence indicators. The latter even reportedly improved significantly in October and November. This was probably influenced by the announcement of publicly funded measures to mitigate the energy price shock.

However, the stabilisation is fragile, and the balance of risks is negative. This means that there is a higher probability of a downward revision of the economic outlook in the future rather than an upward one. The greatest uncertainty is linked to the external environment: the developments in the world economy are so far exceeding expectations, but the outlook is worsening. Military action, sanctions and the response to them continue to have a significant impact on global commodity prices, especially of energy and food, and their volatility.

The labour market situation remains favourable for the employed, with strong demand and a growing number of people in employment in the third quarter, which was 5.5% higher than at the end of 2021. This rapid employment growth was supported by a significant increase in the labour force, driven both by an increase in the working-age population and a higher participation rate.

The main contributor to the increase in the working-age population has been the increase in the number of immigrants. In January–November, almost 52,000 more people entered Lithuania than left it. Refugees from Ukraine account for the major share of these arrivals. Currently, 25,000 of these people have entered the Lithuanian labour market, which is almost 2% of the Lithuanian labour force. Wage growth is projected at 12.8% and will supposedly go up to 9.1% this year.

Energy prices have been the main driver of inflation. The increases are expected to moderate significantly this year, with food prices being the key driver of inflation. Against this background, headline inflation is projected to be 18.9% in 2022, before falling to 9.5% this year. Hope dies last.