OECD Economic Outlook, Volume 2025 Issue 2

Lithuania

GDP growth is projected to increase from 2.5% in 2025 to 3.1% in 2026, before declining to 2.0% in 2027. These projections are largely shaped by household consumption. Strong real wage gains are expected to be compounded by one-off withdrawals from private pension savings in 2026, but both effects will fade in 2027. After a decline in 2024, investment will be supported by improving business conditions, capacity utilisation and financing conditions. Inflation is expected to rise temporarily to 3.5% in 2025, reflecting wage growth and increased excise duties before easing to 3.0% in 2026 and 2.5% in 2027, in line with unit labour cost growth.

The fiscal stance is expected to loosen over the next two years, mainly due to increasing defence and pension spending. Creating additional fiscal space will be key to finance upcoming spending needs. This could be achieved by improving public spending efficiency, broadening the tax base and encouraging formal economic activity. Deepening capital markets by increasing the supply and demand of non-bank capital, leveraging digital financing, and softening the investment rules applicable to pension funds would help alleviate the financial constraints that many firms are facing and support productivity growth.

Growth has recently declined

GDP growth has declined since the end of 2024, amid low capacity utilisation and subdued confidence driving down investment growth. Against a backdrop of weak industrial confidence and a decline in retail sales in September, GDP fell in the third quarter of 2025. Construction output dropped sharply in August before recovering in September, while consumer confidence strengthened in September and October. The labour market remains tight, with labour shortages contributing to strong wage growth in the first half of 2025. The unemployment rate remained at 7.0% in September, below its long-term average. Headline inflation has edged up, reaching 3.7% in October, partly due to the increase in excise duties on fuels, alcohol and tobacco. Core inflation has remained broadly stable since early 2025 and reached 3.0% in October.

While only 6% of Lithuanian exports are directly shipped to the US, Lithuanian firms are integrated into global value chains which ultimately serve the US market. Higher US tariffs on EU goods will thus indirectly weigh on Lithuania through reduced activity in the European Union, which accounts for 60% of Lithuanian exports.

Lithuania

1. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.

2. Total economy.

Source: OECD Consumer Prices database; and OECD National Accounts database.

Statlink

Lithuania: Demand, output and prices

Statlink

Fiscal policy is becoming more accommodative

The fiscal stance has loosened in 2025, and a further easing is expected in 2026. The general government fiscal deficit is expected to increase from 1.3% in 2024 to 2.3% in 2025, 2.8% in 2026 and 2.9% in 2027. The main factor is an increase in total expenditures, driven by pension benefits, public wage growth and defence spending. Defence spending notably is expected to increase from 2.8% of GDP in 2024 to 3.2% in 2025 and close to 4% in 2027 on an accruals basis. On a cash basis, defence spending already represents 4% of GDP in 2025 and is expected to exceed 5% in 2027, consistent with the government target of 5-6% of GDP spent on defence over 2026-30.

Private consumption will continue to support growth

Real wage gains and improving consumer confidence are expected to continue supporting consumption, especially in 2026. Moreover, the government has opened a window for Lithuanians to withdraw cash from their private pension saving accounts in 2026-27. Most withdrawals are expected to occur in 2026 and to provide a temporary boost of around 2 percentage points to private consumption growth. While total investment declined in 2024 and construction stalled in the first half of 2025, investment is expected to rebound, especially in 2026 as EU-funds and financing conditions improve. The unemployment rate is projected to continue declining, despite stagnant employment, reflecting a shrinking labour force. Exports are expected to grow in line with external demand. Growth in the euro area is thus a key risk for Lithuania, along with global energy prices and geopolitical tensions. Headline inflation is expected to ease at the end of 2025 due to lower energy prices and settle at 3.0% in 2026 and 2.5% in 2027, in line with core inflation. This inflation projection is subject to an upward risk as wage growth could be higher than expected.

Structural reforms would improve fiscal sustainability and support investment

Lithuania will face a major demographic shock that will increase pension-related costs. The private pension savings reform risks further undermining the adequacy of the pension system. In this context, building additional fiscal space is needed to ensure fiscal sustainability. This will require improving the efficiency of public spending, mobilising additional tax revenues and encouraging formal economic activity. Strengthening productivity growth will help offset the negative impact of population ageing on living standards. While Lithuania’s product market regulations and insolvency framework are among the most conducive to productivity growth in the OECD, competition in retail energy markets could be reinforced by deregulating electricity and gas prices. Moreover, many firms are facing financial constraints. A deepening of capital markets would support productivity growth by facilitating investment in intangibles, research and development, and technological innovation. This requires increasing the supply and demand of non-bank capital, softening the investment rules applicable to pension funds, leveraging digital financing by improving financial literacy, and listing a wider range of state-owned enterprises. Further strengthening the public integrity framework, including by systematically monitoring the post-public employment activities of high-ranking public officials and reinforcing leadership support for integrity measures in public institutions, would also limit perceived corruption and support investor confidence.