Lithuania was the only euro area Member State that did not see a fall in real GDP in the first quarter of the year. Measures to stem the Covid-19 pandemic and general uncertainty came into force in the second quarter when real GDP contracted by 5.9% and where the decline in domestic demand weighed above all. Private consumption was greatly affected by the closure of most retail stores and the restaurant sector during the freeze, while a decline in investment had already been recorded in the fourth quarter of 2019. Resilient to the pandemic, net exports have fallen less than imports: one of the reasons for the resilience of exports comes from the relative stability of foreign demand for lower value-added products that account for a considerable share of Lithuanian industrial production. In general, it can be said that the timely containment measures of the virus at the beginning of the pandemic have helped the economy as a whole. In response to the Covid-19 crisis, the government adopted a large stimulus package last March and added further measures later in the year. Coface predicts that additional spending, mainly represented by various grants, benefits, and investments, will be almost 6% GDP in 2020. Overall, the increase in expenditure and the automatic stabilizers of the general government deficit to 8.5% of GDP are expected. While most Covid-19-related measures expire at the end of this year, the 2021 draft budget contains new spending measures equal to almost 2% of GDP. For example, the government has decided to increase wages in the public sector and has also suggested some legal changes that would allow the indexation of pensions, which are not covered by the current rules. Overall, due to the gradual reduction of stimulus, the deficit in 2021 is expected to be 6% of GDP, of which 1.5% should possibly be financed by recovery and resilience instruments. Due to the expected high deficits, the debt ratio is expected to increase from 35.9% in 2019 to around 47.3% in 2020 and then further to 50.8% next year.

Private consumption began to recover as early as May, while industrial production picked up considerably in June. This positive trend continued in the third quarter and is confirmed by improvements in confidence indicators. According to the European Commission’s forecasts of good expected results in the agricultural sector, real GDP in the third quarter is expected to rebound again. However, the recent increase in Covid-19 infections and the measures taken to combat it are bound to weigh on economic indicators: this year for real GDP a reduction of about 2.25% is expected.

Exports, including transport services, have been an important growth factor for the economy over the past three to four years. However, the fragile situation of international trade and the requirements of EU reforms in the road transport sector is expected to ease this trend in the coming years. Slower increases in the minimum wage in the public sector and restrictions related to Covid-19 are the causes of lower consumer dynamism in the short term. However, the acceleration of EU investment and further projects initiated by the government in response to the crisis should lead to an increase in overall gross investment. Overall, Lithuania’s GDP growth is expected to reach 3% in 2021 and then remain above 2.5% the following year. In 2020, the current account is expected to show a small deficit: although the moderation of domestic demand will limit imports, the fall in EU demand will worsen the goods deficit. The trade surplus (2.3% in 2019) generated by the high level of exports of services, in particular tourism and road transport, is therefore expected to decrease. Transfers (2.2% of GDP), consisting mainly of European remittances and funds, while remaining constant, will not compensate for the income deficit (5.3%), attributable to the high stock of direct investment in the country (25% of GDP). No major changes are expected with regard to foreign portfolio investments.

Net migration was positive for the first time in 2019 and it is very likely to be positive again later this year, although it is still too early to talk about a reversal of the trend. At the same time, lockdown and the relatively better epidemiological situation than many other European partners could slightly reduce emigration in 2020. However, the pandemic has put a number of jobs at risk, especially in the services sector: unemployment is rising from 6.1% in January to 9.6% in August. To mitigate the situation, the government has introduced a number of measures to protect employees and provide additional support for job seekers: it is expected to decrease from 8.9% in 2020 to 8.0% next year and is expected to continue to decline in 2022.

Overall, inflation is expected to settle at 1.3% this year, rising to 1.5% and 1.7% respectively in 2021 and 2022 thanks to the economic recovery. According to the government’s approved budget, revenue is set to increase significantly (9%), almost at the same rate as an expenditure (8%). The bill provides for an increase in excise duties on hard liquor, tobacco, and fuel, with exemption from excise duty on the diesel used for heating; at the same time, the real estate tax base is being expanded and a tax on polluting cars is introduced. The tax package also includes proposals to tax the activities of credit institutions and retail chains to slow the rise in the non-tax threshold. The stated objective is to accumulate reserves (up to 1.6 billion euros in 2020, or 3.3% of GDP) and reduce public debt, 75% of which is held by non-residents, and almost 30% is denominated in foreign currency. This composition of Lithuania’s gross foreign debt (75.7% of GDP in 2018) must be considered in the light of its composition: State (39%), Central Bank (27.5%), banks (11%), non-financial companies (26%), assets held abroad by the country (84% of GDP).

After a buoyant performance in 2019, growth is expected to slow in 2020 as it begins to move towards its potential level. Private consumption (two-thirds of GDP), the main contributor to growth, is expected to remain strong thanks to rising income, pension indexation, higher minimum wages, and a buoyant labor market. The labor market benefits from the improvement in the historically high level of immigration, which should exceed the equally high level of emigration. At the same time, the squeeze on the labor market and the increase in the minimum wage, high in relation to productivity, will have a negative impact on the competitiveness of companies and consequently on exports (80% of GDP) in a scenario that sees an increase in international trade tensions. Investment (almost 20% of GDP), including EU-funded investment, is expected to continue at a similar pace in 2020. Private investment in equipment and intellectual property is expected to remain an important driver of growth, as businesses continue to face labor shortages and high rates of capacity utilization. Residential construction is expected to contribute less to investment growth due to less favorable financing conditions.