Market overview: next year's economic growth forecast upgraded, 1.5% growth expected this year

Growth Accelerates 

"The Lithuanian economy has already bounced back and is on a growth trajectory – GDP is growing this year, and next year economic growth is expected to accelerate further. This is indicated by very high confidence indicators in the Lithuanian consumers and services sector, and signs of recovery are also evident in the important manufacturing sector, with confidence in this sector on the rise," said Joona Widgren, an economist at OP Financial Group.

OP Corporate Bank has raised its GDP growth forecast for Lithuania next year to 3%, having previously predicted 2.5% in March. This represents double the growth expected this year (1.5%). The economists did not change this year's growth figure when updating their forecasts.

According to J. Widgren, price growth has stabilised, and this year's annual inflation rate is expected to be 1.4%. Due to the recovering economy and strengthening household purchasing power, inflation in the country may rise to 2.5% next year but will not significantly exceed the target of 2%.

Declining Interest Rates Spur Investments

The European Central Bank (ECB) reduced its base interest rates by 0.25 percentage points at the beginning of June. Economists note that although interest rates remain relatively high and weak demand in export markets is hindering investments in the country, positive trends are also emerging.

"Companies have been anticipating this ECB decision and are hopeful for further interest rate cuts, even though the pace of rate adjustments is likely to be slower than previously expected. Nevertheless, this move is already supporting economic growth and investments, and we are seeing increased demand for business financing," said Leda Irzikeviciene, Country Manager of OP Corporate Bank Lithuanian branch.

According to her, transport and logistics companies are once again purchasing new trucks and handling equipment, substantial investments are being made in green energy solutions, and the reduced interest rates will eventually encourage positive shifts in the real estate sector.

Catching Up with Finland

According to OP economists, the purchasing power of the population continues to strengthen as nominal wages continue to rise, and with lower inflation, real incomes are increasing. The economy is also supported by rapidly increasing state investments.

"We estimate that the GDP per capita in Lithuania, adjusted for purchasing power parity, continues catching up with Finland. The recent economic slowdown has somewhat slowed down Lithuania's economic growth, but a similar negative impact has also been experienced by businesses and residents in Finland in recent years," observed J. Widgren.

According to data from the International Monetary Fund (IMF), Lithuania's GDP per capita, adjusted for purchasing power parity, is around 47.9 thousand international dollars. Meanwhile, in Finland, the figure is about 59.4 thousand international dollars.

Situation in the Baltic States

Bank experts predict that Latvia's economy will grow by 1.4% this year and by 2.9% next year – similar to Lithuania. Meanwhile, Estonia's GDP is expected to contract by -0.5% this year but reach the same 3% growth next year.

Annual inflation in Latvia is expected to be 1.5% this year, while in Estonia it is expected to hover around 3%, which will be slightly higher than in Lithuania. Next year, a 2.5% price growth is forecasted for Latvia and 2% for Estonia.

Unemployment in Lithuania, as in other Baltic states, remains stable. This year it stands at 8.5%. In Latvia and Estonia, the unemployment rates are lower, at about 5.5% and 7.5%, respectively.

Although increasing purchasing power is boosting consumption, all Baltic states still face weak demand in export markets.

The Lithuanian branch of OP Corporate Bank is the fifth largest bank in Lithuania by business loan portfolio size, amounting to EUR 1.3 billion. The bank serves large and leading medium-sized enterprises in the country.