​The 2024 European Commission Country Report on Lithuania provides a comprehensive analysis of the nation's economic performance, fiscal health, and structural challenges within the framework of the European Semester. In 2023, Lithuania's economy experienced a modest contraction of 0.3%, attributed to subdued consumer spending, weak exports, and tight financing conditions. Despite a strong rebound in real GDP after a negative first quarter, the economy stagnated in the latter half of the year. Exports of goods, particularly in the chemical, plastic, wood, and furniture sectors, were adversely affected by sluggish global demand, while service exports showed signs of recovery. Looking ahead, GDP growth is projected to reach 2% in 2024 and 2.9% in 2025, primarily driven by consumer spending and continued investments.

Inflation, which had spiked to a record high of 18.9% in 2022, moderated to 8.7% in 2023, as energy prices declined in the second half of the year and the growth in prices of food and manufacturing products slowed. The Harmonised Index of Consumer Prices (HICP) inflation is forecasted to fall further to 1.9% in 2024 and 1.8% in 2025. Wage growth, although expected to decelerate from the double-digit increases observed in 2023, is anticipated to remain elevated due to a tight labor market and planned increases in minimum and public sector wages.

The labor market in Lithuania demonstrated resilience amidst economic challenges. The employment rate stood at 78.5% in 2023, surpassing the EU average of 75.3%. The influx of over 52,000 working-age migrants fleeing the war in Ukraine since February 2022 contributed to this high employment rate, with more than half employed by the third quarter of 2023. However, total employment growth is expected to decelerate in 2024 and turn negative in 2025, influenced by demographic trends and limited new migration inflows. The unemployment rate increased to 6.9% in 2023 and is projected to slightly rise to 7.0% in 2024 before returning to 6.9% in 2025.

Despite the robust labor market, Lithuania faces challenges related to labor supply shortages and skills mismatches, which hinder competitiveness and potential growth. Labor market tightness reached its highest level in 15 years, with the job vacancy rate increasing steadily from 1.45% in 2019 to 2% in the fourth quarter of 2023. These indicators point to significant skills mismatches and shortages, particularly in sectors like construction, as highlighted by the 2023 European Investment Bank Investment Survey.

On the fiscal front, Lithuania's general government debt remained relatively low but showed signs of increasing. The debt-to-GDP ratio is projected to rise from 38.2% in 2023 to 38.9% in 2024 and further to 41.6% in 2025. This upward trend is primarily driven by a rising deficit, which grew from 0.6% of GDP in 2022 to 0.8% in 2023, and is expected to reach 1.8% in 2024 and 2.2% in 2025. The increasing deficit is mainly attributed to higher expenditures on pensions, social benefits, and public sector wages, without corresponding tax increases. General government expenditure is projected to rise from 36.3% of GDP in 2022 to 40.7% in 2025, indicating continued spending pressures on public finances.

In summary, while Lithuania's economy shows signs of recovery, structural challenges persist, particularly in the labor market and fiscal sustainability. Addressing skills mismatches, managing demographic trends, and ensuring fiscal discipline will be crucial for sustaining economic growth and enhancing competitiveness in the coming years.