According to TV3.lt, Swedbank economists raise their GDP growth forecast for Lithuania and believe the Lithuanian economy will grow the fastest among the Baltic States this year and next. Inflation will likely rise next year, but personal incomes will still grow three times faster than prices.
The US economy is forecast to grow by around 2.5% this year, similar to last year. In comparison, the Eurozone’s GDP growth is expected to remain below 1% this year despite the recovery in the purchasing power of the euro area population.
“The US economy continues to be driven by expansionary fiscal policy and the continued strength of US consumer spending. However, we are seeing more signs of a weakening labour market and rising unemployment, so the surprising growth is set to fade. Eurozone growth is being held back by cyclical factors – high interest rates – and structural reasons such as still relatively expensive energy and labour shortages,” said Nerijus Mačiulis, Chief Economist at Swedbank, comparing regions.
The economist points out that the weakest link remains its industry, which is still not growing in many Eurozone countries, while in Germany, it has fallen to its lowest level in a decade.
“The good news is that, with inflation down and employment and wages still growing strongly, the purchasing power of Eurozone residents is recovering rapidly. However, with many people’s expectations of their finances lower than usual, we have not yet seen a recovery in consumption, with retail sales in the major Eurozone countries remaining at around the same level they were at the end of the last decade,” said Mr Mačiulis.
Swedbank economists forecast that 2025 the US and Eurozone economies will grow at a similar pace of around 1.5 per cent.
Central Banks will cut interest rates faster
The European Central Bank (ECB) is expected to cut interest rates at least twice more this year, with base rates to be cut to 2 per cent by the end of 2025.
“Inflation in both the US and the Eurozone remains above 2%, but it is already low enough for Central Banks to ease monetary policy and cut interest rates more boldly,” believes Mačiulis.
However, economists point out that a further decline in inflation is not guaranteed. Tensions in the Middle East have already more than doubled the cost of shipping containers, liquefied natural gas has also been rising recently, and protectionist policies such as higher import tariffs could fuel inflation.
“Inflation stuck at too high a level, making it harder for Central Banks to cut interest rates, is one of the main risks that could hold back the recovery in many countries. So far, many countries and sectors have been surprisingly resilient to high interest rates, but the negative impact of tighter monetary policy has only been a matter of time. The number of new bankruptcies in Germany has risen to its highest level in almost a decade. In France, it is at its highest level since 2009,” concluded Nerijus Mačiulis.
Lithuania is one of the fastest-growing economies in the region
The bank’s economists have raised their forecast for Lithuania’s GDP growth this year and believe GDP is expected to increase by 2.2 per cent. Next year’s growth forecast is unchanged, expected to accelerate to 2.8 per cent. Economists estimate that Lithuania will have the fastest economic growth among the Baltic countries both this year and next.
“As expected, this year, we are seeing rapid growth in the population’s purchasing power and a recovery in retail trade. However, unlike in many other EU countries, Lithuanian industry is also recovering, with almost all sectors growing,” Mačiulis commented on the factors behind Lithuania’s economic growth.
In the first seven months of this year, manufacturing production grew by 3.3%, and in July alone, the annual growth rate was almost twice as fast. However, the economist points out that a rapid export recovery should not be expected, as export orders are still below their long-term historical average.
The bank’s economists believe that personal consumption, not exports, will remain the main driver of Lithuania’s economic growth this year and next. The period of ultra-low inflation is forecast to end soon, with inflation accelerating from 0.9% this year to 2.8% in 2025. However, average wage growth will slow only slightly to 8.2%, roughly three times faster than price growth.
“The growth in domestic demand has so far been driven by population growth, with net immigration of around 140 000 over the last three years, representing around 5% of the country’s population. Immigration is easing but should remain positive in the coming years. However, finding more sustainable sources of long-term growth would require more skilled immigrants, not more, and, in particular, faster growth in business investment,” concluded Mr Mačiulis.
In the first quarter of this year, the value of private sector investment was almost a tenth lower than a year ago. However, Lithuania’s business loan portfolio is growing at one of the fastest rates in the Eurozone, and economists predict that investment growth will accelerate to 6.5% next year, mainly driven by private rather than public sector investment.
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