Lithuania Economic Forecast

Early estimates revealed that GDP rebounded year on year in Q2. Absent a detailed breakdown, inflation dropped sharply through the quarter, alleviating some of the pressure on household spending. In Q3, our panel anticipates GDP flatlining. In July, sentiment in the retail, services and construction sectors fell from Q2’s average, while employment expectations eased to the lowest level since June 2020. That said, harmonized inflation fell to a near two-year low in July, while producer prices declined further year on year. In other news, on 3 August, Lithuania signed an agreement with Estonia and Latvia to synchronize the Baltic electricity grid with the EU-operated system by early 2025—sooner than previously planned—disconnecting from the Russia-controlled network of CIS countries. The move bodes well for energy security, investment and the green transition.

In July, harmonized inflation fell to a 22-month low of 7.2% (June: 8.2%). The moderation was largely due to a sharp drop in price pressures for housing and utilities. Average inflation will ease this year from last year’s level thanks to tighter monetary conditions and softer domestic demand. A potential spike in energy prices poses an upside risk.