Taking into account the intentions of the US and the European Central Bank to keep interest rates at higher levels for longer, the worsening outlook for the global economy, and the potential risks to EU energy prices, Citadele’s economists forecast a higher inflation rate in 2024, and lower than expected GDP growth in Lithuania, according to a press release.
Although the forecasts announced in June of this year projected a 3.1 per cent increase in Lithuania’s Gross Domestic Product (GDP) for 2024, economists at Citadele Bank have reduced their growth projections to 2.3 per cent. Additionally, compared to the June forecasts, the Bank has increased Lithuania’s inflation forecast by 0.8 percentage points next year, projecting a 2.5 per cent inflation rate.
Inflation will not slow down as fast as expected
The Bank’s experts calculate that the unemployment rate in Lithuania will reach 6.6% in 2023 and 5.9% in 2024, while wages are expected to grow by 5.4% in 2024.
Mārtiņš Āboliņš, an economist at Citadele Bank, says Lithuania’s GDP forecasts have been trimmed due to the impact of the high-interest rate burden on economic activity and the risks of energy canals.
“As far as interest rates are concerned, their increase affects the economy with some delay. Therefore, we believe that in the fourth quarter of 2023 and the beginning of 2024, both in the Baltic region and in the macro indicators of the Western countries, we will increasingly see the impact of interest rates and, consequently, lower economic activity,” says Āboliņš.
The second risk identified by the Bank’s economist, which was considered in the macro projections for Lithuania in 2024, is the unstable situation in the energy market. After reaching EUR 20/MWh in Europe in the summer, gas prices are now close to the EUR 50/MWh mark, even though EU gas storage facilities are almost complete.
“The supply-demand balance in the EU gas market remains fragile and vulnerable, and the situation in the oil market is similar. We continue to see risks of higher energy prices, and accordingly, we expect inflation in Western markets and Lithuania to slow down less than expected. In Lithuania, inflation will reach 2.5% in 2024, which is still above the 2% target,” the economist said.
Economic growth, but at a slower pace
However, according to Citadele Bank economist Aleksandras Izgorodinas, although the Bank has cut Lithuania’s GDP forecast for 2024, GDP growth is still expected to increase next year, as is an improvement in the labour market.
“The Lithuanian economy is expected to grow slower, but we do not foresee an economic contraction. We forecast that the Lithuanian economy will grow by 2.3% over 2024, which should be enough to bring the unemployment rate down to 5.9% from 6.6% this year. Industry, which dragged down the Lithuanian economy in 2023, will contribute to Lithuania’s economic development next year. Looking at leading indicators, we are already seeing more positive signals from the Lithuanian industry, and we expect a stronger recovery in the first quarter of 2024 when the European industry will start producing goods again. This will also stimulate the development of Lithuanian industry and the economy”, Izgorodinas predicts.
The Bank’s experts also provided good news – it is estimated that the average wage in Lithuania will rise by 6.8% in 2024, which will be influenced by both the increase in the minimum wage and the low unemployment rate.
In turn, the inflation rate is expected to reach 2.5% in 2024, meaning wages are expected to rise faster than prices next year, thus increasing the purchasing power of the Lithuanian population.