Lithuania Economic Forecast

After declining in Q4 2022, the economy likely weakened further in Q1. In January–March, industrial output fell at a notably faster rate than Q4’s average, with March’s figure slumping to a near 11-year low. In January–March, retail sales continued to fall on average and economic sentiment deteriorated. Coupled with the highest unemployment rate since January 2022 in the first two months of the year, this bodes ill for spending and investment. The external sector also weakened in January–February, with exports growing at a slower pace than in Q4 and imports growth cooling significantly from the prior quarter. Meanwhile, the Ministry of Finance recently unveiled plans for a tax reform envisioning additional personal income tax for high earners, corporate income tax breaks for SMEs and higher social security contributions for the self-employed. The initiative followed an earlier proposal for a temporary windfall tax on the banking sector.

Harmonized inflation eased for the sixth consecutive month to 15.2% from 17.2% in February. Our panel projects price pressures to nearly halve in 2023 on waning domestic demand, lower commodity prices and higher interest rates. Energy price spikes and stronger-than-expected economic activity pose upside risks to the outlook.