Economic outlook: GDP growth to accelerate next year with purchasing power and production at record levels

Faster than neighbours, slower than last year

“Lithuania’s economy has grown the fastest among the Baltic States this year, even though the pace has been slightly slower than last year, when GDP increased by 2.7%. It is still an excellent result, considering that higher US tariff rates came into force, disrupting international trade, and industrial production volumes declined throughout the year,” said Joona Widgren, Senior Economist at OP group, presenting the economic outlook.

Compared with the September forecast, the bank revised Lithuania’s GDP growth projection for this year from 3% down to 2.5%, while next year’s forecast (3%) remains unchanged.

Annual inflation this year is expected to reach 3.5%, compared to 2.1% last year. According to the bank’s economists, next year inflation will remain close to 3%.

The worst-case scenario regarding US tariff increases did not materialize this year. The tariffs introduced in summer are higher than in previous years, yet lower than feared in spring. The international trade environment is now significantly calmer compared with the first half of the year.

Purchasing power at historic highs

Households’ financial situation continues to improve. This year, purchasing power grew further in Lithuania and Latvia, while in Estonia it declined.

“Over the past decade, Lithuanians’ purchasing power has increased by 55% – one of the fastest increases in Europe and the best result in Lithuania’s modern history. This trend is driven by rapid wage growth and stronger economic performance compared with other Baltic countries,” says Leda Irzikeviciene, Country Manager of OP Corporate Bank’s Lithuanian branch.

During the same period, purchasing power in Latvia increased by 38%, and in Estonia by just 20%.

Consumer sentiment improving again

Consumer sentiment is currently recovering across all three Baltic States. In Lithuania, consumer confidence is significantly stronger than in Estonia and Latvia, and also above the European average (EU flash estimate: –13.6 points; Lithuania: +3.1 points).

Mid-year, Lithuanian consumers’ sentiment had weakened but recovered in the autumn and now exceeds the long-term average.

Calculations show that private consumption has room to grow in all three Baltic States – the past years’ consumption levels have remained below the trend. This indicates that despite improving sentiment, households remain cautious and save part of their rising income as a safety buffer.

“Improving financial situation of households suggests moderate growth in consumption, which next year will also be supported by early withdrawals from the second pension pillar. However, for many residents, it would be rational to direct part of these funds toward long-term investment rather than consumption – Lithuanian households still have a relatively small amount of financial assets compared to Western European countries. Therefore, long-term capital accumulation is becoming an important foundation for sustainable economic growth and personal financial stability,” Leda Irzikeviciene notes.

Industrial sector pauses this year

Sentiment in Lithuania’s industrial sector is not as positive as among consumers. This year, industrial production volumes have declined. Among Baltic countries, production increased only in Latvia, while in Estonia it fluctuated and currently stands at a similar level to the start of the year.

“Lithuania’s production volumes are currently about the same as last autumn. At the end of last year, industry grew very rapidly, but gradually decreased over the course of this year,” Joona Widgren notes.

According to the economist, Lithuania’s industrial output has grown 57% over the past decade – almost twice as fast as Latvia’s (31%) and nearly three times faster than Estonia’s (18%).

“Lithuanian manufacturing businesses deserve recognition for such rapid growth and their ability to adapt to global demand – something not every country achieves. Highly open economies like Lithuania are strongly dependent on international trade trends,” he adds.     

Latvia and Estonia return to growth

OP’s economist forecasts that after several years of recession, Latvia’s and Estonia’s economies will return to growth this year.

Latvia’s GDP is expected to grow 1% this year and 2.5% next year. Inflation in Latvia will reach 3.5% this year and decrease to 2% next year. Growth next year will be supported by domestic demand and rising exports.

Estonia’s GDP is expected to grow 0.5% this year and 2.5% next year. Inflation, however, remains high: 5.3% this year and 3.5% next year. Economic growth will be driven by fiscal policy, which will also increase the country’s budget deficit.