Lithuania - OECD Economic Outlook 2019 by OECD

 171

Lithuania Economic growth is projected to ease amid weak export market conditions and capacity constraints. A slower increase in EU fund disbursements will also bear on investment. Strong wage growth will support consumption and reduce income inequalities, but put pressure on service prices and potentially on competitiveness. The government budget will remain in a small surplus in 2020-21. A healthy fiscal position is vital to support the implementation of further structural reforms to address social needs and improve skills. Measures should aim to reduce large skill mismatches through improvements in educational outcomes and effective re-skilling programmes. Promoting business dynamism by lowering administrative burdens is also essential for higher productivity growth. Growth has been resilient Economic activity has remained robust. Private consumption has continued to be supported by rapidly rising wages and higher social transfers, as well as intensified immigration flows and concomitant employment gains. Investment has strengthened, benefiting from a surge in construction and a faster implementation of EU-funded projects. High capacity utilisation has spurred business expenditure. Exports grew solidly in the first half of the year, driven by buoyant grain and service exports, but have subsequently lost momentum. Business confidence and export expectations have weakened, pointing to a softening in activity. Headline inflation remains subdued, due to lower oil prices, but rapid wage increases in excess of productivity growth continue to exert pressures on service prices.

Lithuania Investment and exports have proved resilient

Private sector indebtedness and house prices remain below historical highs

Volumes Y-o-y % changes 18

Index 2006Q1 = 100 140

Investment

Credit to private non-financial sector →

130

Exports

% of GDP 80

← Real house prices

120

110

100

6 4 2 0 -2

2015

2017

2019

2006

2008

2010

2012

2014

2016

2018

Source: OECD Economic Outlook 106 database; and European Central Bank. StatLink 2 https://doi.org/10.1787/888934045715

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION © OECD 2019

172 ď ź

Lithuania: Demand, output and prices

2016

2017

GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Harmonised index of consumer prices Harmonised index of core inflation2 Unemployment rate (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

2019

2020

2021

Percentage changes, volume (2015 prices)

Current prices EUR billion

Lithuania

2018

38.9 24.5 6.6 7.7 38.9 - 0.3 38.6 26.3 26.0 0.3

4.2 3.5 -0.3 8.2 3.7 -1.0 2.8 13.6 11.5 1.5

3.6 3.7 0.5 8.4 4.1 -0.8 3.4 6.3 6.0 0.4

3.6 3.7 1.3 7.0 3.9 -1.8 2.0 7.9 5.9 1.6

2.5 3.8 0.7 4.4 3.4 0.2 3.8 2.3 3.1 -0.5

2.5 3.4 0.6 4.0 3.0 0.0 3.1 3.7 4.5 -0.5

_ _ _ _ _ _ _ _ _

4.3 3.7 2.6 7.1 -3.6 0.5 47.3 39.3 0.5

3.3 2.5 1.9 6.1 -5.1 0.6 41.1 34.1 0.3

2.4 2.3 2.2 6.0 -4.9 0.1 40.3 33.2 1.9

2.3 2.2 2.2 5.9 -4.7 0.1 39.6 32.5 0.7

2.2 2.2 2.2 5.9 -4.6 0.1 39.0 31.9 0.2

1. Contributions to changes in real GDP, actual amount in the first column. 2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco. Source: OECD Economic Outlook 106 database.

StatLink 2 https://doi.org/10.1787/888934046646

Strengthening skills remains a key priority Monetary conditions in the euro area remain very accommodative. The relatively low cost of borrowing and fast rising incomes keep housing market activity at record highs and growth of house prices strong, though developments differ significantly across regions. Housing loans increased by around 9% in the first half of the year. As the private credit-to-GDP ratio and real house prices are still low by historical standards, risks to financial stability seem contained. The authorities need to continue using prudential measures pro-actively to prevent imbalances from emerging. The 2020 budget entails further increases in social spending, notably child benefits, and pay rises for public sector employees in areas such as education and health. The increased expenditures of these poverty-reducing initiatives are partially compensated by an improvement in tax administration, including through the development of a continuous taxpayer control system to prevent tax fraud, and increases in some taxes, such as excise duties on fuel, strong alcohol and tobacco products. After easing in 2019, the fiscal stance is assumed to become broadly neutral in 2020-21. A healthy fiscal position is vital to address social needs and support further structural reforms in key areas, such as education and innovation, and for safeguarding low debt levels.

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION ÂŠ OECD 2019

 173 Strengthening skills and reducing skill mismatches are key to higher productivity and inclusiveness. Many workers are over-qualified for the jobs they do. Measures that improve teaching quality and make the education system more responsive to labour market needs are vital. Moreover, vocational education should be strengthened through more work-based training and made more attractive for young people. Fostering strong and relevant skills also hinges upon effective up-skilling and re-skilling programmes that promote life-long learning and enhance employment opportunities and labour market inclusiveness.

Growth will slow GDP growth is projected to ease to 2½ per cent in 2020-21 as the global slowdown takes its toll on exports and business confidence. A weaker increase in EU fund disbursements, as flows return to normal levels, will also be a drag on investment. Domestic demand will be further influenced by the declining population, restraining consumption growth. The unemployment rate will remain at around 6% over the projection period. A positive migration balance has helped to alleviate labour shortages, but supply constraints will continue to bite, reinforced by a large skills mismatch. Fast wage increases will keep prices in the service sector elevated. Weaker-than-expected growth in Lithuania’s main EU trading partners could curb exports and investment, while larger-than-anticipated labour market imbalances could lead to faster wage increases, harming competitiveness. On the upside, implementation of structural reforms could foster stronger productivity and output growth.