EC downgrades Lithuania’s GDP growth projections to 1.7 percent

Overall, euro area real GDP is forecast to grow 1.6 percent in 2015, accelerating to 1.8 percent in 2016 and 1.9 percent in 2017. For the EU as a whole, real GDP is expected to rise from 1.9 percent this year to 2.0 percent in 2016 and 2.1 percent in 2017, the European Commission said.

Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, said: “Today’s economic forecast shows the euro area economy continuing its moderate recovery. Growth is largely backed by temporary factors such as low oil prices, a weaker euro exchange rate and the ECB’s accommodative monetary policy. The euro area has shown resilience to external developments, such as the slowdown in world trade, and this is encouraging. Sustaining and strengthening the recovery requires taking advantage of these temporary tailwinds to pursue responsible public finances, boost investment and carry out structural reforms to enhance competitiveness. This is important, particularly against the backdrop of a slowing global economy, continuing tensions in our neighbourhood and the need to manage the refugee crisis decisively and collectively.”

Lithuania’s economy grew just 1.4 percent in the first half of 2015, considerably less than expected. While domestic demand growth was stronger than in 2014, overall growth was hit by a significant drop in exports to Russia. As a result, growth for 2015 is forecast at 1.7 percent.

Lithuania’s real GDP growth is forecast to accelerate to 2.9 percent and 3.4 percent in 2016 and 2017, respectively. Rising nominal wages are expected to support strong growth in private consumption, which is set to remain the main growth driver.

Export growth is forecast to improve in 2016 as the impact of the Russian crisis fades and demand from the EU strengthens. By 2017, Lithuania should have redirected most of the exports lost in 2015 to other markets. However, as imports are set to grow faster than exports based on the high import content of domestic demand, net exports are expected to be a drag on real GDP growth in 2016 and 2017, albeit to a lesser extent than in 2015.

Strong job creation is expected to bring the unemployment rate down to 9.4 percent in 2015. While employment growth is seen slowing in 2016 and 2017, unemployment should continue to decline as negative demographic developments combined with net emigration are set to shrink the labour force. This tightening of the labour market is set to fuel strong wage growth over the forecast horizon.

In 2015, the general government deficit is forecast to increase to 1.1 percent of GDP from 0.7 percent a year before. Higher social spending and an increase in defence expenditure were not covered by new revenue measures. 2015 tax revenues are expected to be close to the government’s plan despite lower-than-expected nominal GDP growth because tax rich domestic consumption is growing strongly. For 2016, the general government deficit is set to increase to 1.3 percent of GDP. The general government deficit is forecast to fall to 0.4 percent of GDP in 2017.