Lithuania’s Finance Ministry on Tuesday downgraded its economic growth forecast for this year and warned that inflation will rise faster than previously expected, citing the impact of tensions in the Middle East.
Under an updated economic scenario presented Tuesday, the country’s gross domestic product is now projected to grow by 3.1% in 2026, down from a 3.3% forecast made last September.
Inflation is now expected to reach 3.7% this year, 0.5 percentage points higher than previously projected.
Finance Minister Kristupas Vaitiekūnas said the revised outlook reflects the effect of the Middle East conflict on fuel prices and the broader economy, though only partially due to ongoing uncertainty.
“The entire situation surrounding the Middle East conflict is highly uncertain. Everything is changing very rapidly, and oil prices sometimes fluctuate by more than $10 per day several times,” Vaitiekūnas said while presenting the forecast.
“There is nothing stable to rely on, except initial indications that the conflict could last four to six weeks,” he added.
Despite the downgrade, the minister said Lithuania’s economy is expected to maintain relatively strong growth this year, among the highest in the European Union.
Domestic demand to drive growth
The ministry expects the economy to be supported by strong domestic demand, fuelled by increases in pensions and the minimum wage, as well as withdrawals from private second-pillar pension funds, which are likely to boost consumption.
“This year’s budget is quite stimulative for the economy. This is reflected in household consumption and investment in fixed capital,” Vaitiekūnas said.
Exports of goods and services are projected to grow by 2.7% in real terms, supported by stronger-than-expected growth in key trading partners such as Germany, Poland, Latvia and France.
“We expect these markets to grow faster than anticipated six months ago, which will positively affect our export performance,” the minister said.
Risks outweigh upside
Looking ahead, the ministry warned that risks to the economy remain elevated. GDP growth is projected to slow to 2.3% in 2027 before picking up to 2.8% in 2028.
Vaitiekūnas said geopolitical tensions, including the risk of “hybrid threats”, uncertainty in international politics and weaker growth in some eurozone economies, continue to weigh on the outlook.
“Beyond the conflict in the Middle East, there are other risks, from hybrid threats to less favourable economic developments in parts of the eurozone and broader geopolitical tensions,” he said.
Positive factors include resilient domestic and foreign demand and a growth-supportive fiscal policy.
Energy prices push inflation higher
The ministry said higher energy prices, particularly oil, are the main driver of rising inflation, along with continued increases in service costs. Food prices are not currently expected to contribute significantly to inflation.
“Unrest is transmitted through oil prices, and if oil prices remain elevated for a prolonged period, this can affect the prices of other goods and services,” Vaitiekūnas said.
Wages to outpace inflation
Despite higher inflation, wages are expected to grow faster. The ministry forecasts average wages to rise by 7.9% in 2026, 0.6 percentage points more than previously expected.
According to the minister, real wage growth is likely to remain positive, potentially approaching 4%.
“When we have strong external inflationary pressure, wage growth is also robust, as are pensions. This means real wage growth will remain clearly positive,” he said.
The ministry forecasts the unemployment rate at 6.8% this year, unchanged from previous estimates, while investment is expected to increase to 5.7% of GDP.
The updated economic scenario will form the basis for Lithuania’s 2027–2029 budget planning.
Newsletter
Every Friday morning.
