Surprised by what’s happening in Lithuania: this is what makes us stand out in the EU

A happy Lithuanian child
A happy Lithuanian child/ Fotolia photo

Lithuanian economists are surprised to see our country’s economic growth: the Estonian economy has been in recession for two years, Latvia’s has been stagnating, and Lithuania’s has been booming. Consumer confidence in Lithuania stands out among the Baltic countries and across the EU. For almost all of last year, consumer confidence was the highest in the EU, while in Estonia, it was the worst for nearly all last year, Simona Viltrakytė states in lrytas.lt.

“We can learn from Estonia what not to do,” said Greta Ilekytė, Swedbank economist, at the forum Trends and Prospects 2025.

The differences between Lithuania and the rest of the Baltic countries, especially Estonia, are visible but are expected to decrease somewhat this year. According to Ilekytė, Lithuania is expected to grow by around 3% this year, while Estonia is expected to grow by half.

Inflation differentials will also decrease: last year, Estonia’s inflation rate was much higher than Lithuania’s due to an increase in the value-added tax rate, higher income taxes and higher pollution taxes.

“Swedbank expects inflation in Lithuania to accelerate slightly to around 3% this year, while in Estonia it will be slightly higher and in Latvia it will be similar to Lithuania.

Interesting real wage figures: in Estonia, real wages are at 2018 levels. This means that people’s incomes are rising in nominal terms, but in real terms, people can afford less.

“At the same time, purchasing power is rising rapidly in Lithuania. We forecast that by the end of 2026, it will be 37% higher than in 2019,” the economist said.

People in Lithuania are also positive about their personal financial situation and are planning major purchases. Regarding consumer confidence, we stand out among the Baltic countries and across the EU. For almost all last year, Lithuania had the highest consumer confidence index in the EU, while Estonia had the worst for almost the whole year.

“The main reason for this is inflation in Lithuania: people were tired of high prices, and last year inflation was close to 0%. In turn, this was driven by very high wage growth,” commented Ilekytė.

The Bank forecasts that this year, price growth will accelerate due to the rise in raw materials prices, such as the purchase of raw milk, electricity and gas, and oil prices and rising salaries.

Average wages in Lithuania are rising by around 10% a year. The minimum monthly wage (MMA) has increased by 12% since 1 January. Overall, the MMA in Lithuania has grown by an average of almost 13% over the last 10 years, almost the highest in the EU.

“With the MMA rising rapidly, it would be hard to expect average wages to grow more slowly,” said the economist.

But rising wages can have harmful side-effects.

Rising wages raise the incomes of the lowest earners, which can be beneficial. However, it can also negatively affect a country’s competitiveness.

“The side-effects can be quite severe: the International Monetary Fund last year investigated why Estonia’s economy contracted. One of the main reasons was the loss of competitiveness, mainly due to higher wages,” explained Ms Ilekytė.

We are competing not only with other Baltic countries but also with China, India, Vietnam, and Bangladesh. Last year, we already started to see the first signs of a rise in bankruptcies in sewing and textile companies.”

According to the Swedbank economist, our economy is transforming: we will produce fewer low-value-added products and more high-value-added ones. But, she said, very rapid wage growth could also hurt the regions where it is more difficult to pay high wages.

“One of the reasons we saw a rise in unemployment last year is linked to the situation where some companies cannot retain workers. We forecast that the unemployment rate will increase slightly this year,” said Ilekytė.

Another reason for the rise in the unemployment rate in Lithuania is immigration. The number of foreigners in Lithuania fell slightly last year. Interestingly, while the number of Ukrainians decreased, people from India occupied the top five for the first time.

The number of returning Lithuanians is also rising, with positive migration recorded since 2019. This will be primarily because low-skilled jobs are filled mainly, while the share of high-skilled arrivals is only 3%.

It is difficult to say what to expect in two years

As US President Donald Trump enters his second term in office, he is an unpredictable figure, and the world’s economies, including Lithuania’s, will have to navigate some very choppy waters.

“It is challenging to say what will be ahead of us in two or three years. We can make assumptions for now,” said Ms Ilekytė.

The assumption is that tariffs will be introduced. So far, there is talk that a universal tariff could be imposed on all countries, including Lithuania. Probably the first step will be to see what happens when a tariff is introduced and then decide: perhaps to impose higher tariffs on some countries or perhaps to break them down by sector.

Lithuania has a very open economy. On average, in the Euro Zone, our economy is much more open than others, which means that we are much more dependent on external factors and could be affected by US tariffs.

Less migration to the US can lead to higher inflation and interest rates, which can also affect the European Central Bank’s monetary policy.

We already see that Lithuania is preparing to spend 5% of its Gross Domestic Product on defence, as Trump has said he will.

“One of the most dangerous things is how the fight against climate change will be affected because Trump has said that climate change is a fiction.

Trump is determined to increase oil production, which may have some impact on fuel prices, but denying climate change is quite dangerous. Scientists explain that the fires in the Hollywood Hills were also primarily caused by climate change.

We often forget that we are affected by climate change, but look at the prices of coffee, cocoa, and olive oil, and you will discover that they are changing to a large extent because of climate change,” said the economist.

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