OP Corporate Bank: Lithuania’s economy to grow 3.2% as consumer spending approaches its long-term trend

Lithuania remains the regional leader

“Lithuania’s economic growth has gained momentum and consumer spending is rising, although exports are slowing. Nevertheless, Lithuania is set to maintain the fastest growth among the Baltic states for the seventh consecutive year – a significant achievement given the challenging geo-economic environment,” says Joona Widgren, Senior Economist at OP Pohjola, presenting the economic outlook.

Next year, Lithuania’s economy is expected to grow by 2%, down from the 2.5% growth forecast in the summer. Inflation is expected to fall to 3%, compared with the previous forecast of 2.5%.

The decline in inflation is being hampered by the ongoing conflict in the Middle East, which is keeping oil and gas prices elevated.

Lithuania currently has the highest inflation rate among the Baltic states. At the beginning of the year, Lithuania overtook Estonia, where inflation reached 4.8% last year.

Consumer spending is closest to its long-term trend

Withdrawals from pension funds are supporting stronger consumer spending this year, particularly in the middle of the year. However, this increase in consumption is temporary, and growth is expected to slow next year.

“This summer, Lithuanian households spent as large a share of their income on consumption as they did in the “good times” before the pandemic, during the 2010–2020 period. Consumer spending is now closest to its long-term trend and to its potential level – the level households might reach if it were not for the tense geopolitical situation, crises and uncertainty, which encourage people to save more and set aside larger financial buffers. This has helped businesses generate stronger revenues in the domestic market this year,” says Leda Iržikevičienė, Country Manager of OP Corporate Bank in Lithuania.

The volume of household consumption in Lithuania, after adjusting for seasonal effects, has this year approached EUR 9 billion per quarter. Lithuanians spend roughly as much on consumption as Latvians and Estonians combined – almost EUR 5 billion and EUR 4 billion, respectively.

Consumer spending is also being supported by rising real incomes and higher wages. Wage growth continues, although at a slower pace.

Nevertheless, actual individual consumption per capita in Lithuania, expressed in purchasing power standards, still stands at just 87% of the EU average. In Latvia, this indicator stands at 73%, and in Estonia at 74%, according to Eurostat data.

Positive sentiment globally

Following a strong start to the year, industrial production in Lithuania has declined, with exports slowing accordingly. A similar trend is being seen in Estonia, while production is growing this year in Latvia and Finland.

Unemployment has fallen across all three Baltic states, while the labour market remains stable.

“Oil prices fluctuated significantly during the summer but remained below spring levels. Market expectations for oil prices are declining, with the Strait of Hormuz expected to gradually reopen in the autumn, which should also lead to a gradual decline in prices,” says the economist.

According to OP economist, the outlook for global economic growth improved over the summer. Global trade increased by 7.6% compared with last year, representing the second-fastest growth rate in the past five years.

Investment related to the development of artificial intelligence remains one of the key drivers of the global economy.

“Winter is approaching, and if energy and fuel prices remain high, this will have a negative impact on the Lithuanian economy and businesses,” L. Iržikevičienė emphasizes.

Latvia’s growth pleasantly surprised

OP economists have also raised their forecast for Latvia’s GDP growth this year, to 2.5% from the 2% forecast in June. Next year’s economic growth forecast remains unchanged at 3%.

The inflation forecast for this year has been lowered to 3.5%, while next year’s forecast remains at 2.5%.

The Latvian economy has delivered surprisingly strong results this year, and growth is expected to continue. It is being supported by domestic demand, both from households and the government. Public-sector spending is being boosted by increased investment in defence.

Estonia gets a positive boost from Finland

Estonia’s economy is also growing this year. However, OP economists have lowered their GDP growth forecast to 2.3%, from the 2.5% expected in the summer. The bank forecasts 2.5% growth for Estonia next year.

The bank has also lowered its inflation forecast to 3.2% this year and 2.5% next year.

Private consumption is recovering in Estonia as household incomes rise and domestic demand strengthens.

The Finnish economy has also started growing more rapidly this year, supporting demand for Estonian exports.