COMMISSION STAFF WORKING DOCUMENT In-depth review for Lithuania Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK 2023 European Semester – Spring Package
Date: 2023-05-24
Institutions: European Commission, Secretariat-General
Subjects: European Semester, Lithuania, competitiveness, economic policy, energy policy, inflation, macroeconomics, manpower needs, property market, real estate credit

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 24.5.2023  SWD(2023) 637 final  COMMISSION STAFF WORKING DOCUMENT In-depth review for Lithuania Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK 2023 European Semester – Spring Package {COM(2023) 600 final} - {SWD(2023) 628 final} - {SWD(2023) 629 final} - {SWD(2023) 630 final} - {SWD(2023) 631 final} - {SWD(2023) 632 final} - {SWD(2023) 633 final} - {SWD(2023) 634 final} - {SWD(2023) 635 final} - {SWD(2023) 636 final} - {SWD(2023) 638 final} - {SWD(2023) 639 final} - {SWD(2023) 640 final} - {SWD(2023) 641 final} - {SWD(2023) 642 final} - {SWD(2023) 643 final} - {SWD(2023) 644 final}  
 
 
Lithuania 

In-Depth Review 2023 

 
 
 
 
 
 
 
 
 
 
 
 
 
On  the  basis  of  this  in-depth  review  for  Lithuania  undertaken  under 
Regulation  (EU)  No  1176/2011  on  the  prevention  and  correction  of 
macroeconomic  imbalances,  the  Commission  has  considered  in  its 
Communication “European Semester – 2023 Spring Package” (COM(2023) 
600 final) that: 

Lithuania is not found to experience imbalances. Vulnerabilities relating to price 
competitiveness,  external  balances  and  house  price  developments  have  recently 
increased but overall seem to be contained at present. The economy was strongly 
affected by the energy price shock with inflation rising fast; however, Lithuania’s 
competitiveness  is  projected  to  recover  slowly  as  energy  prices  are  falling.  The 
current account deteriorated markedly in 2022 on account of the increased energy 
import  prices  but  is  forecast  to  move  close  to  balance  this  year.  Going  forward, 
mild current account deficits will not compromise external sustainability given its 
sound stock position. Nonetheless, inflation and wage pressures, if persistent, risk 
impairing  Lithuania’s  competitiveness,  particularly  as  core  inflation  is  well  above 
the euro area average. House prices have grown strongly since the pandemic, but 
there  is  no  evidence  of  overvaluation  and  prices  are  now  moderating  given  the 
interest  rate  rises  and  the  economic  recession  underway.  In  addition,  household 
debt  is  low,  and  the  banking  sector  is  well  capitalised,  highly  profitable  and 
records  low  non-performing  loans.  The  policy  setting  is  overall  favourable, 
although  some  policies  could  help  to  address  the  risks  from  the  identified 
vulnerabilities.  Continued  counter-cyclical  fiscal  and  macroprudential  policies, 
reinforced  when  needed,  would  be  important  in  that  respect.  At  the  same  time, 
more  focus  on  fostering  competition  in  the  domestic  market  and  policies  to 
increase the quality and quantity of labour supply could help to manage price and 
unit labour cost pressures. 

 
 
 
 
 
 
 
 
CONTENTS 

1.  Introduction 

2.  Assessment of macroeconomic vulnerabilities 

LIST OF TABLES 

Table 2.1: 
Table 2.2: 
Table 2.3: 
Table 2.4: 

Selected economic and financial indicators (Part 1), Lithuania 
Selected economic and financial indicators (Part 2), Lithuania 
Selected housing market indicators, Lithuania 
Selected household debt indicators, Lithuania 

LIST OF GRAPHS 

Graph 2.1: 

Inflation measures and contributions, Lithuania 

Graph 2.2:  GDP deflator decomposition, Lithuania 

Graph 2.3:  Selected graphs: productivity, wage, and profit dynamics in tradable vs non-tradable sectors, Lithuania 

Graph 2.4:  Selected graphs: current account, external trade and NIIP dynamics, Lithuania 

Graph 2.5:  Components of gross fixed capital formation deflator growth and consumer price inflation 

4 

6 

19 
20 
21 
22 

9 

10 

16 

17 

18 

 
 
 
 
 
 
 
1. 

INTRODUCTION 

In  2022,  over  the  previous  annual  cycle  of  surveillance  under  the  Macroeconomic 
Imbalance Procedure (MIP) Lithuania was not subject to an in-depth review to assess its 
vulnerabilities. (1) The 2023 Alert Mechanism Report published in November 2022 concluded that 
an  in-depth  review  (IDR)  should  be  undertaken  for  Lithuania  this  year,  with  a  view  to  examine 
newly  emerging  vulnerabilities  and  their  implications. (2)  It  found  that  concerns  related  to  cost 
competitiveness existed before the COVID-19 pandemic and recent developments brought them to 
the fore. Nominal unit labour cost growth has been strong in recent years and is set to remain high, 
while core inflation has also been high compared with Lithuania’s euro area peers. Nominal house 
price growth has been among the highest in the EU, and associated with strong loan growth.  

Lithuania’s economic growth was impeded by surging inflation in 2022 and is expected 
to  remain  weak  in  2023,  mainly  due  to  subdued  internal  and  external  demand. (3)  Real 
GDP grew by 1.9% in 2022, with a contraction in the final quarter, driven by a fall in real household 
disposable  incomes  and  a  concomitant  decline  in  real  consumption  growth.  Russia’s  war  of 
aggression  exacerbated  a surge in  energy  prices,  which translated  into  broader  inflation  over  the 
course of 2022. It reached 18.9% in 2022 and was one of the highest in the EU. Inflation reached 
its  peak  in  September  2022,  at  22.5%,  though  still  standing  at  15.2%  in  March  2023  despite 
energy  prices  coming  down,  as  core  inflation  remains  high  (although  decreasing  slightly  but 
steadily after reaching a peak in November 2022). House prices were also growing rapidly in 2021-
2022,  reaching  a  historically  high  growth  rate  of  22.1%  in  Q2  2022.  However,  they  have  been 
decelerating since then and are projected to continue to decelerate also in 2023. The high inflation 
rates  have  eroded  households’  purchasing  power.  Real  adjusted  household  disposable  income 
decreased in 2022 and is projected to remain stable in 2023. As a result, real private consumption 
growth  decreased  to  0.5%  in  2022  and  is  projected  to  remain  only  slightly  positive  at  0.1%  in 
2023. Along with weak external demand, this is projected to result in low real GDP growth of 0.5% 
in  2023.  In  2024,  economic  growth  is  projected  at  2.7%,  as  demand  is  projected  to  strengthen. 
However, despite the slowdown in the economy, the labour market continued its recovery in 2022 
and is expected to relatively withstand the downturn. Total employment reached a record high but 
is  projected  to  decrease  slightly  in  2023.  Similarly,  the  unemployment  rate  decreased  in  2022, 
before rising slightly in early 2023. Persistent uncertainty coupled with the tightening of financial 
conditions  may  have  a  negative  impact  on  aggregate  investment.  Potential  delays  in  the 
implementation of EU funds also constitute a downside risk to investment growth. 

This  in-depth  review  presents  the  main  findings  of  the  assessment  of  macroeconomic 
vulnerabilities  for  Lithuania.  Vulnerabilities  related  to  housing,  external  sustainability  and 
competitiveness  in  Lithuania  are  also  discussed  in  horizontal  thematic  notes  that  were  recently 
published. (4) The MIP assessment matrix is published in the 2023 Country Report for Lithuania. (5) 

(1)  European Commission (2022), European Semester Spring Package 2022, COM(2022) 600 final. 

(2)  European Commission (2022), Alert Mechanism Report 2023, COM (2022) 381 final. 

(3)  European Commission (2023), European Economic Forecast: Spring 2023, Institutional Paper 200. 

(4)  European Commission (2023), Housing Market Developments: Thematic Note to Support In-Depth Reviews, European 
Economy: Institutional Papers, 197. European Commission (2023), Inflation Differentials in Europe and Implications for 
Competitiveness: Thematic Note to Support In-Depth Reviews, European Economy: Institutional Papers, 198. European 
Commission (2023), External Sustainability Analysis: Thematic Note to Support In-Depth Reviews, European Economy: 
Institutional Papers, 196.  

(5)  European Commission (2023), Country Report Lithuania 2023, SWD(2023) 615 final. 

4 

 
 
 
 
 
 
 
 
                                                 
 
2.  ASSESSMENT OF MACROECONOMIC 
VULNERABILITIES 

Gravity, evolution and prospects  

Lithuania  has  been  selected  for  an  in-depth  review  to  assess  risks  related  to  external 
balances,  deteriorating  price  competitiveness  linked  to  the  build-up  of  wage  and  price 
inflation differentials with its trading partners, and strong housing price growth.  House 
price growth in Lithuania picked up significantly in 2021 and accelerated further in 2022. While this 
follows  a  period  of  subdued  house price  growth,  the  review  examines the  reasons  for  the  recent 
acceleration. Wage growth was robust all through the past decade and has accelerated after the 
pandemic to 10.6% in 2022. At the same time productivity grew more slowly than wages leading 
to increasing unit labour costs (ULC), which grew at 5.9% on average over the ten years to 2022. 
Household  savings  reached  record  levels  during  the  COVID-19  related  lockdown  in  2020.  This 
overall setting gave a further boost to HICP inflation on top of energy and commodity input prices 
over  2020-2022.  ULC  growth,  inflation  and  house  price  growth  in  Lithuania  were  among  the 
highest in the euro area in 2022, which could give rise to competitiveness concerns, if persistent. 
Finally,  while  Lithuania’s  net  international  investment  position  has  constantly  improved  over  the 
past decade, the current account widened significantly in 2021 and 2022, which warrants a closer 
look at the drivers of the break in pattern. 

On  5  April  2023  the  Commission  presented  a  horizontal  thematic  note  on  housing 
markets,  which  also  covered  Lithuania.  It  showed  that,  despite  strong  house  price  growth  in 
the past three years, the housing market does not appear to be overvalued. Over the last decade, 
house prices have doubled in nominal terms, with 50% of this increase taking place over the last 
three  years.  House  prices  started  to  grow  significantly  in  2021,  partly  due  to  pandemic-related 
restrictions and increases in construction costs. They kept accelerating also in 2022 under general 
inflationary  pressures.  Despite  that,  over  the  last  decade  the  house  price  increase  has  broadly 
tracked the increase in personal income. At present, price-to-income ratios are still lower than those 
at  the  peak  some  15  years  ago.  According  to  the  Commission’s  valuation  methodology,  house 
prices  appear  to  still  be  slightly  undervalued  on  average,  although  some  differences  might  exist 
among municipalities. According to the Bank of Lithuania’s valuation model, house prices appeared 
to be  slightly  overvalued by around 2.2% on average based on Q4 2022 data (6).  This estimated 
overvaluation  is  still  relatively  small  and  well  below  the  values  before  the  global  financial  crisis, 
when it reached between 35% and 50%. 

Pandemic-related  restrictions  and  construction  material  supply  chain  issues  led  to  a 
slower  development  of  new  housing  supply  and  a  significant  increase  in  construction 
costs, which affected house prices. Before the pandemic, housing supply moved together with 
sales  and  the  house  price-to-income  ratio  was  stable.  On  the  supply  side,  housing  construction 
steadily increased until the pandemic, with investment in residential buildings rising from 2.8% of 
GDP in 2015 to 3.2% in 2020. As a result of pandemic restrictions, residential housing investment 

(6)  Central Bank of Lithuania, ‘Kas vyksta būsto rinkoje? (Duomenų komentaras)’, 2023 March 26, More: 

https://www.lb.lt/lt/naujienos/kas-vyksta-busto-rinkoje-duomenu-komentaras 

5 

 
                                                 
 
2. 

Assessment of macroeconomic vulnerabilities 

decreased  to  3%  in  2021,  before  bouncing  back  to  3.6%  in  2022.  However,  despite  the  recent 
recovery in residential investments, construction costs remain significantly above the pre-pandemic 
levels,  which  continues  to  put  upward  pressures  on  house  prices:  from  December  2019  to 
December  2022,  construction  costs  increased  by  almost  30%,  mostly  due  to  increased  costs  of 
materials  (34%)  and  equipment  (22%)  and  -  to  a  lesser  extent  –  higher  wages  of  construction 
workers  (20%)).  Latest  data  shows  that  supply  of  new  flats  continues  to  increase (7)  and 
construction  costs  have  decreased  in  Q1  2023 (8).  These  trends  are likely to  continue  throughout 
the  rest  of  the  year  due  to  decreasing  energy  prices  and  renewed  supply  chains,  creating 
favourable conditions for house price growth to decelerate further.  

Tightening  financial  conditions  are  leading  to  a  turning  point  in  the  housing  and 
mortgage  markets,  with  the  house  price  and  mortgage  growth  rates  decelerating  in 
2023.  Housing  market  activity  is  moderating  after  the  post-pandemic  bounce-back  and  high 
activity  in  2021  and  partially  in  2022.  The  number  of  officially  registered  home  sales  has  been 
decreasing since March 2022, and in the first months of 2023 it reached the lowest value since the 
start  of  the  pandemic (9).  The  slowdown  in  the  housing  market  is  due  to  high  inflation  that  is 
reducing real incomes, rising interest rates and the war negatively affecting consumer confidence. 
Annual residential real estate price growth is still high (16% in Q4 2022), but due to lower demand 
it has been slowing since mid-2022. More recent monthly data on apartment prices show that the 
growth rate keeps decelerating also in the first months of 2023: the annual growth rate decreased 
from 18.2% in December 2022 to 12.7% in March 2023 (10). Along with the general slowdown in 
the housing market, mortgage lending is also slowing down, with the flow of new loans in Q4 2022 
being  8%  lower  than  on  average  in  Q1-Q3  2022 (11).  In  December  2022,  the  total  outstanding 
amount of mortgages, as a percentage of GDP, reached its pre-pandemic level (17.2%). Expected 
rises in interest rates will likely contribute to a further slowdown in lending. However, while there is 
a larger number of factors suggesting slower price growth in the short run, in the medium to long 
run, upward pressure on housing prices arises from continued high growth in (nominal) incomes as 
well as increasing positive net migration from abroad (12). Continued internal migration towards the 
largest cities puts upward pressure on urban house prices, while hampering it in rural areas. 

As  the  majority  of  houses  are  owned  without  mortgages  and  mortgages  are  stress 
tested for increases in interest rates, household debt does not pose a significant threat 
to financial stability. Household debt increased only slightly in the last decade. It stood at 22.1% 
of  GDP  in  2022,  well  below  the  fundamental  threshold  but  a  bit  higher  than  the  prudential 
threshold (13). Mortgage debt stood at 17.2% of GDP in 2022. Only a relatively small share of the 
population  has  a  mortgage  –  16.6%  in  2021,  whereas  the  EU  average  was  at  26.1%,  and  more 
than 40% of house purchases (when measuring purchase values)  is financed without mortgages. 
However,  mortgage  debt  is  significant  among  mortgage  holders,  as  it  corresponded  to  180%  of 

(7)  Central Bank of Lithuania, ‘Kas vyksta būsto rinkoje? (Duomenų komentaras)’, 2023 March 26, More: 

https://www.lb.lt/lt/naujienos/kas-vyksta-busto-rinkoje-duomenu-komentaras  

(8)  State data agency ‘Statistics Lithuania’. 

(9)  Lithuanian Centre of Registers. 

(10)  Central Bank of Lithuania. 

(11)  Central Bank of Lithuania. 

(12)  It is estimated that net immigration increased from around 20 000 people in 2021 to 72 000 in 2022, cfr. State data 

agency ‘Statistics Lithuania’. 

(13)  European Commission (2023), Housing Market Developments: Thematic Note to Support In-Depth Reviews, European 

Economy: Institutional Papers, 197. 

6 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

average disposable income in 2021 (14). As flexible rate mortgages predominate and interest rates 
continue to rise (15), the mortgage debt service to income (DSTI) ratio is also increasing. However, 
household resilience to higher mortgage payments must be tested when issuing loans in Lithuania: 
the  DSTI  must  be  at  most  50%  if  the  borrowing  (interest)  rate  were  to  increase  to  5% (16).  This 
reduces  risks  stemming  from  increasing  interest  rates.  While  mortgage  payments  are  increasing, 
non-performing  mortgage  loans  continued  to  decrease  in  Q3  2022  and  stood  at  0.58  %  -  the 
lowest  since  2007 (17).  Overall,  the  risk  of  widespread  mortgage  defaults  is  low  and  would  only 
have a limited impact on the stability of the banking system, given the small size of the mortgage 
market, although vulnerable borrowers could come under pressure. 

On  5  April  2023  the  Commission  presented  a  horizontal  thematic  note  on  cost 
competitiveness and  inflation differentials  in Europe,  which  also  covered  Lithuania. (18) 
The  analysis  showed  that  domestic  factors  played  a  dominant  role  for  the  increase  in  personal 
consumption  expenditure  (PCE)  prices  (and  its  differential  from  other  euro  area  countries),  in 
addition to external factors. The horizontal note observes a negative correlation between inflation 
in 2022 and price levels in 2021, likely resulting from a higher share of energy components in the 
consumption  basket  as  well  as  the  price  convergence  processes  in  the  EU  single  market. 
Furthermore,  Lithuania’s  inflation  differential  to  the  EU  is  partly  explained  by  its  relatively  high 
sensitivity to external shocks: the external energy price shock affected domestic prices more as the 
energy weight in the HICP inflation basket is larger compared to other EU countries, and Lithuania’s 
production structure is about twice as energy-intensive as that of the EU. However, the increase in 
inflation  can  only  be  partly  explained  by  the  impact  of  the  external  shock.  The  analysis  showed 
that, while import prices contributed substantially to private consumption inflation (around 10 pp.) 
in 2019-2022, the contribution of domestic-origin inflation, at around 16 pp., is greater in Lithuania 
than in most other EU member states. The part of PCE price growth that is explained by changes in 
import  prices  can  be  expected  to  correct  once  import  prices  normalise.  However,  domestic-origin 
inflation could be more persistent, as it was partly driven by rapidly rising ULCs. 

Increasing  energy  prices  have  pushed  up  prices  across  the  board,  with  divergent  core 
inflation  between  Lithuania  and  the  euro  area  (graph  2.1  a).  Year-on-year  HICP  inflation 
peaked at 22.5% in September 2022 in Lithuania, being one of the highest in the euro area. Energy 
and  food  have  been  the  main  contributors  (graph  2.1  b).  The  energy  price  shock  affected 
Lithuania’s  HICP  significantly  more  than  other  euro  area  countries.  Lithuania  is  among  the  most 
reliant on energy imports among all EU countries (19). Commodity price pressures have also passed 
through  the  food  supply  chain,  with  food inflation  reaching  26.2% in  2022.  Finally,  core inflation 
also increased significantly, peaking at 12.7% in November 2022, one of the highest rates among 
euro area countries. In comparison, euro area core inflation peaked at 5.7% in March 2023.  

(14)  European Commission (2023), Housing Market Developments: Thematic Note to Support In-Depth Reviews, European 

Economy: Institutional Papers, 197. 

(15)  Interest rates for new mortgage loans reached 4.42 % in December 2022, 2.4 pp. more than a year ago. 

(16)  The sensitivity test was introduced since November 2015, as part of the broader ‘Responsible Lending Regulations’. When 
granting credit with a variable interest rate (which can be changed regularly or under the terms and conditions specified in 
the credit agreement during its validity period), the creditor must perform an interest rate sensitivity test and make sure 
that the borrower will be able to meet debt obligations if the interest rate increases. While performing a sensitivity test of 
the borrowing rate, the creditor, when calculating the DSTI, must use the applicable borrowing rate not lower than 5%. The 
DSTI resulting from the sensitivity test of the borrowing rate shall not exceed 50%. 

(17)  Central Bank of Lithuania. 

(18)  European Commission (2023), Inflation Differentials in Europe and Implications for Competitiveness: Thematic Note to 

Support In-Depth Reviews, European Economy: Institutional Papers, 198 

(19)  European Commission (2023), Inflation Differentials in Europe and Implications for Competitiveness: Thematic Note to 

Support In-Depth Reviews, European Economy: Institutional Papers, 198 

7 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

if  persistent,  have  the  potential  to  adversely  affect 
Inflation  differentials, 
competitiveness  if  not  matched  by  productivity  gains.  Differences  in  inflation  rates  have 
already  resulted  in  an  appreciation  of  Lithuania’s HICP-based  real  effective  exchange  rates.  Over 
the past decade, compared to the euro area, the REER based on core and HICP inflation appreciated 
by roughly 13% and 12%, respectively, in Lithuania, of which 5 and 8 percentage points occurred in 
2022 only. However, Lithuania’s REER appeared to be in line with fundamentals up until 2022. (20) 
For  2018,  Coutinho  et  al.  (2021)  find  the  REER  to  be  overvalued  by  about  10-20%  using  REER 
benchmark  models,  but 
line  with  fundamentals  based  on  a  current  account-based 
assessment. (21) The latter holds true also for 2021. The IMF finds the REER of Lithuania in 2021 to 
be slightly undervalued based on a current account assessment and a REER model (22). Despite the 
appreciation  of  Lithuania’s  REER,  its  export  market  shares  continued  to  increase  (in  real  and 
nominal terms) from 2016 up until 2022. 

in 

Graph 2.1: Inflation measures and contributions, Lithuania 

Source: Eurostat, European Commission services 

Both nominal wages and profits drove domestic-origin inflation. The estimated contribution 
of  domestic-origin  inflation  to  private  consumption  inflation  in  Lithuania  increased  in  the  period 
2019-2022 relative to the period 2016-2019. The estimated domestic contribution reflects rising 
ULC  and  profit  margins  (as  reflected  also  in  the  notable  rise  in  operating  surplus  in  national 
accounts  statistics)  (graph  2.2) (23).  Nominal  wages  growing  faster  than  productivity  resulted  in 
increasing  ULC  (see  graph  2.3  a),  as  well  as  in  the  appreciation  of  the  ULC-based  real  effective 
exchange  rate  (REER)  over  the  2018-2021  period (24).  At  the  same  time  profitability  was  also 
increasing in Lithuania faster than on average in the EU. In 2022, gross operating surplus (as % of 
GDP) reached and surpassed pre-pandemic levels (graph 2.3 d). In effect, the corporate sector on 
the  aggregate  managed  to  raise  its  profitability  despite  the  rise  in  input  costs.  Furthermore, 

(20)  European Commission (2023), Inflation Differentials in Europe and Implications for Competitiveness: Thematic Note to 

Support In-Depth Reviews, European Economy: Institutional Papers, 198 

(21)  Coutinho et al. (2021), "Methodologies for the Assessment of Real Effective Exchange Rates," European Economy – 

Discussion Papers 2015 - 149, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission. 

(22)  IMF (2022): “Word Economic Outlook”, October 2022. 

(23)  European Commission (2023), Inflation Differentials in Europe and Implications for Competitiveness: Thematic Note to 

Support In-Depth Reviews, European Economy: Institutional Papers, 198 

(24)  European Commission (2023), Inflation Differentials in Europe and Implications for Competitiveness: Thematic Note to 

Support In-Depth Reviews, European Economy: Institutional Papers, 198 

8 

0510152025EU27ROSKCZHULVLTEE%b) HICP and contributions,2022EnergyServicesNon-energy industrial goodsFoodAll items05101520253035404550EA19EU27ROSKCZHULVLTEE%a) Inflation measures, 2022HICPCOREPPI   
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

producer  price  inflation  remained  at  a  relatively  low  rate,  close  to  the  HICP  (25%  and  18.9%, 
respectively), and slightly lower than the EU  and euro area averages in 2022. This, together with 
increasing  profits,  indicates  that  producers  transferred  increases  in  their  production  costs  onto 
consumers  relatively  swiftly.  Overall,  it  might  suggest  low  competition  in  Lithuania’s  domestic 
economy. 

Graph 2.2: GDP deflator decomposition, Lithuania 

Source: European Commission services based on AMECO  

Contrary to consumption deflator changes, Lithuania’s export price changes were mainly 
affected  by  imported  energy  prices,  while  domestic-origin  inflation  did  not  have  a 
significant effect. According to the analysis presented in the horizontal thematic note, Lithuania 
appears to be a unique case when prices of its export are analysed: the energy import price impact 
seems to be the sole determinant of the increase in export prices, while domestic factors appear to 
have had a negative effect on the overall prices of Lithuania’s export over 2019-2022 (graph 2.4 
b). This is likely linked to the low domestic content and high energy-intensity of exports: Lithuania’s 
main exported goods and services are transport services and minerals. 

Productivity grew faster in the tradables than in the non-tradables sector over the last 
five years, resulting in lower nominal ULC growth, while profits kept increasing. Nominal 
ULC grew by around 40% in the non-tradables sector and by 32% in the tradable sector over the 
last  five  years.  The  difference  between  tradables  and  non-tradables  was  driven  mostly  by 
differences in productivity growth. At the same time, due to very high inflation, ULC growth in the 
tradable sector stood at 13.6% in 2022, as compared to 13.2% in non-tradables. Real wage growth 
was in line with productivity growth over the 2016-2021 period, and in 2022 productivity growth 
significantly  surpassed  real  wage  growth  (graph  2.3  a).  Profits  have  been increasing  significantly 
more than wages in the main tradable sectors (such as manufacturing or agriculture) over 2019-
2022 (graph 2.3 c).  

Unit  labour  cost  growth  and  inflation  are  expected  to  decelerate  in  2023-2024.  Unit 
labour  cost  growth  is  projected  to  reach  9.1%  in  2023  and  3.1%  in  2024,  presenting  a  marked 
decline from 2022 (14.0%). Signs of cooling in the labour market emerged at the end of 2022, with 
the number of vacancies decreasing and a slight pick-up in the unemployment rate. The slowdown 
in GDP growth is expected to negatively affect employment growth, yielding a slower wage growth 
in  2023.  However,  labour  shortages  remain  a  persistent  issue  for  the  Lithuanian  labour  market, 

9 

-404812162017201820192020202120224-quarter, % changeULC contributionNet unit tax contributionUnit profit contributionGDP deflator  
2. 

Assessment of macroeconomic vulnerabilities 

which  will  eventually  bring  upward  pressures  to  wage  growth.  Inflation  was  already  on  a 
deceleration trend at the turn of the year, after peaking in 2022 at 18.9%. It is set to reach 9.2% in 
2023  thanks  to  the  declining  global  price  of  energy  and  other  commodities,  and  by  the  gradual 
easing of price pressures in Lithuania’s major trading partners. Nevertheless, HICP inflation is set to 
remain above the EU average in 2023. In 2024, HICP inflation is expected to come closer to the EA 
average, reaching 2.2%, with the decline in energy and input prices. 

Wage  setting  in  Lithuania  is  firm-based  and  fully  flexible,  allowing  for  quick 
adjustments  in  the  short  term.  Wage  indexation  to  inflation  is  typically  not  used.  Collective 
bargaining  in  Lithuania  takes  place  predominantly  at  the  company  level,  but  the  coverage  is 
relatively  low,  below  10%,  compared  to  an  EU  median  of  slightly  above  50%.  While  minimum 
wages  registered  a  significant  increase  between  January  2021  and  January  2023,  as  a  share  of 
average wages their level cannot be considered as excessively high. Public sector wage growth has 
been in line with private sector trends.  

The  risk  that  unit labour  cost  growth  in  the tradables  sector  could  be  fuelled by  wage 
pressures stemming from the non-tradables sector seems contained. Lithuania’s economy 
is characterised by labour supply shortages: the working age population is projected to continue to 
decrease in Lithuania, and employment already reached a record-high level of 79% of the working-
age population in 2022. In this context, if wages in the non-tradables sector keep growing faster 
than  in  tradables  (graph  2.3  a),  this  might  create  spill-over  effects  between  the  sectors  in  the 
future. Despite that, current pressures from the non-tradable sector do not appear to be significant. 
There is no evidence of any catching up of the tradables sector yet (see graph 2.3 a). According to 
data  from  the  last  quarter  of  2022,  the  monthly  average  wage  was  still  higher  in  the 
manufacturing  sector  (the  main  goods  exporting  sector)  than,  for  example,  in  the  construction 
sector (a sector that could attract employees from manufacturing) (graph 2.3 b). In addition, even if 
wages  in  the  tradables  sector  start  growing  more  strongly  due  to  pressures  from  non-tradables, 
there can still be offsetting productivity increases, as productivity tends to grow more strongly in 
the tradables sector in general. Finally, as the recent strong growth in profitability in the tradables 
sector  shows,  for  the  time  being  ULC  growth  in  the  tradables  sector  can  still  be  absorbed 
(depending on the magnitude of the increase) without price increases, while keeping profit growth 
above the level in the economy overall (graph 2.3 c). 

The risk of cost competitiveness losses stemming from Lithuania’s inflation differential 
to  the  euro  area  appears  limited,  but  would  increase  if  inflation  becomes  entrenched. 
Lithuania’s export market share is projected to start growing again in 2024, after a small downtick 
in 2023, but at a slower pace. As discussed  in the previous paragraphs, Lithuania’s export sector 
has not yet been affected by the domestic-origin inflationary pressures (which is likely linked to the 
higher productivity and flexibility of the export sector as well as relatively low domestic content of 
exports).  Thus,  once  energy  prices  decrease,  this  should  feed  through  to  lower  export  prices  for 
Lithuania. However, some pressures affecting the non-tradable sector may turn out to be of a more 
persistent  and  long-lasting  nature  (such  as  core  inflation  or  increases  in  wages  that  are  not 
matched with increases in productivity) or could be seen as structural issues (such as labour supply 
shortages, which is projected to become even more severe in the future). Going forward, pressures 
related to the increasing wages in the non-tradables sector are estimated  to be  contained in the 
short or medium term, however, in the long-term it might lead to unsustainable ULCs growth and 
slower increases in export market shares or even slower economic growth in general. 

On  5  April  2023  the  Commission  presented  a  horizontal  thematic  note  on  external 
sustainability, which also covered Lithuania. The analysis showed that the worsening current 
account balance in the first three quarters of 2022 was mostly related to high energy prices, which 
translated into higher energy imports in value terms. Since the financial crisis of 2008, Lithuania’s 
current account has remained broadly in balance, with a significant swing into surplus during the 

10 

2. 

Assessment of macroeconomic vulnerabilities 

COVID-19  pandemic.  The  current  account  balance  equalled  -5.1%  of  GDP  in  2022. (25)  This 
represents a deterioration from a surpluses in 2019-2021. These changes have mostly been driven 
by the dynamics of the trade balance, which was positive and increased significantly in 2020-2021, 
but  then  dropped  and  turned  negative  in  2022.  The  worsening  of  the  overall  trade  balance 
reflected  almost  entirely  the  movements  in  the  goods  balance  (graph  2.4  a).  More  precisely,  the 
breakdown of the balance of trade in goods shows that the deterioration in 2022 (especially when 
comparing to the pre-pandemic period) was almost entirely observed only in the trade of mineral 
products.  As  mentioned  in  previous  paragraphs,  Lithuania  is  more  susceptible  to  external  energy 
price shocks, as it imports most of its energy, and its industry is very energy-intense. Interestingly, 
in terms of volumes, the overall (goods and services) trade balance remained relatively stable and 
positive over 2019-2022 (graph 2.4 b). Thus, the deterioration in the overall balance of trade has 
been  crucially  shaped  by  the  changes  in  trade  deflators,  with  the  import  deflator  increasing 
significantly  faster  than  the  export  deflator  (graph  2.4  c).  As  a  result,  the  terms  of  trade  also 
deteriorated in 2022, and, as in many other Member States, the deterioration was largely driven by 
energy prices. 

The current account deficit is expected to recover in line with decreasing energy prices 
in  2023  and  2024.  The  prices  of  natural  gas  and  electricity  are  now  expected  to  decrease 
considerably for this year and the next. Consequently, lower energy prices would lead to a positive 
direct  impact  on  the  trade  and  current  account  balances  through  a  higher  balance  of  trade  in 
energy goods. Furthermore, economic growth has slowed significantly in Q4 2022, posing a risk of 
technical recession. The slowdown is associated mostly with the decrease in domestic demand. Due 
to  high  inflation,  domestic  demand,  especially  private  consumption,  has  weakened  significantly. 
This  should  also  support  a  gradual  correction  on  the  current  account.  As  a  result,  the  current 
account balance is set to reach -0.9% of GDP in 2023 and 0.1% of GDP in 2024. 

Despite  the  current  account  deficit,  Lithuania  is  projected  to  sustain  a  sound  external 
stock  position  in  the  near  future.  The  Commission’s  horizontal  thematic  note  on  external 
sustainability  also  covered  an  analysis  of  Lithuania’s  net  international  investment  position  (NIIP).  
Lithuania’s NIIP was still somewhat below the norm but far above prudential thresholds in 2022. 
NIIP was improving steadily since the global financial  crisis until  2022. It moved from  -23.5% of 
GDP in 2019 to  -7.4% in 2021, and  -6.7% in 2022. Since Lithuania’s liabilities largely consist of 
foreign direct investment, its NIIP excluding non-defaultable instruments (NENDI) has been positive 
since  2019  and  reached  21.5%  of  GDP  in  2022.  From  a  sectoral  perspective,  the  overall 
improvement  before  2022  was  driven  by  an  increase  in  the  central  bank’s  positive  net  position, 
while the government sector considerably supported the improvement in 2022 (graph  2.4 d). The 
deceleration  in  the  NIIP  improvement  since  2021  has  been  driven  by  a  combination  of  declining 
positive net transaction and valuation effects, and a persistent large negative investment income 
effect  (graph  2.4  e).  The  NIIP  is  projected  to  improve  mildly  and  gradually,  with  the  NIIP  turning 
balanced by 2032 under the baseline scenario (see graph 2.4f). Under the alternative assumptions 
of scenarios 1 and 2, the NIIP is expected to come at around 16% of GDP, i.e. close to -15% of GDP 
over  the  same  period,  showing  some  sensitivity  to  alternative  assumptions  of  energy  price 
developments. (26) 

(25)  While the horizontal note on the external sustainability considers data up to Q3 2022, the numbers here are updated for 

the whole 2022. The main messages remain unchanged. 

(26)  The optimistic alternative scenario (scenario 1) assumes higher trade balances in 2025 and thereafter by 2 pp of GDP, 
higher real GDP growth in 2025 by 2 pp, as well as lower inflation rate by 1 pp in 2025 than in the baseline scenario. It 
illustrates a case of a more positive trade balance evolution amid lower energy prices than under the baseline. The 
pessimistic alternative scenario (scenario 2) describes a corresponding adverse shock in which it assumes the same timing 
and the magnitude of deviations from the baseline, but with the opposite sign. 

11 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

Overall, given Lithuania’s sound stock position, the mild current account deficits will not 
compromise  external  sustainability.  Even  though  Lithuania  experienced  one  of  the  largest 
declines in the current account balance over 2019-2022, it is projected that, along with decreasing 
energy prices, the current account will gradually recover in the following years, reaching  -0.9% in 
2023 and 0.1% in 2024 (27). As Lithuania has a relatively strong external  stock position, with the 
NIIP  coming  close to  balance,  and  with  a  strong  NENDI,  there  do  not  seem to  be  any  immediate 
external sustainability issues, even with a moderate current account deficit. 

Assessment of MIP relevant policies 

Lithuania plans to continue its efforts to reduce its dependency on energy imports and 
improve  its  connectivity  to  Europe’s  energy  markets,  which  is  key  to  minimising 
Lithuania’s  vulnerability  to  external  energy  price  shocks  in  the  future.  In  recent  years, 
Lithuania  has  successively  abandoned  imports  of  gas,  oil,  electricity  and  coal  from  Russia  by 
redirecting  energy  imports  through  the  LNG  terminal  in  Klaipėda,  the  oil  terminal  in  Būtingė,  the 
new Gas Interconnection Poland-Lithuania (GIPL), the enhanced interconnection with Latvia, as well 
as the existing electricity interconnections with Poland, Latvia and Sweden (28). However, Lithuania 
still imports around two thirds of its electricity from abroad, due to insufficient, albeit increasing, 
domestic  electricity  generation.  Lithuania  aims  to  increase  the  generation  of  electricity  from 
renewable sources to 7 TWh by 2030, which will ensure at least 50% of total domestic electricity 
consumption (29).  At  the  same  time,  Lithuania,  with  Estonia  and  Latvia,  is  still  part  of  the  BRELL 
electricity network controlled by Russia, which poses a geopolitical risk. Lithuania’s energy security 
could  be  improved  by  the  timely  implementation  of  electricity  grid  synchronisation  with  the 
Continental European Network (CEN); Lithuania is preparing to join CEN by 2025. Lithuania will also 
implement several investment projects as part of its Recovery and Resilience Plan, aiming to reduce 
its  dependency  on  energy  imports,  for  example:  support  for  the  development  of  local  renewable 
energy sources, and installation of electricity storage infrastructure, which will facilitate Lithuania’s 
efforts to disconnect from BRELL electricity network.  

Government  policies  in  response  to  the  energy  price  surge  cushioned  the  impact  on 
consumers,  yet  they  were  not  targeted  and  did  not  preserve  the  pricing  signal  to  cut 
back  on  energy  consumption.  In  2022  Lithuania’s  government  introduced  one  of  the  most 
generous support packages in Europe, amounting to around 1.3% of GDP in 2022, aiming to absorb 
some of the energy price increase for businesses and households. The package is also being partly 
applied in 2023. Electricity and gas prices were compensated above a certain threshold (partly for 
businesses  and  fully  for  households),  and  VAT  compensations  were  introduced  for  heating  of 
residential  properties.  Instead  of  targeting  businesses  that  were  most  vulnerable  to  the  energy 
price shock, which in Lithuania are often exporting companies, compensations fed into the overall 
economy,  contributing  to  some  extent  to  the  increasing  gross  operating  surpluses  and  wages  in 
2022  (graph  2.3  d).  Furthermore,  adopted  measures  did  not  preserve  the  price  signal  to  reduce 
energy  demand  and  increase  energy  efficiency.  These  measures,  if  prolonged,  would  further 
suppress the price signal and put additional pressure on the general government deficit. 

Investments  in  skills  and  health  could  help  increase  labour  supply,  which  faces  a 
structural decline due to ageing. Due to population ageing, the Lithuanian economy is facing a 

(27)  Forecast data are from European Commission (2023), European Economic Forecast: Spring 2023, Institutional Paper XXX. 

(28)  European Commission (2023), Country Report Lithuania 2023, SWD(2023) 615 final. 

(29)  European Commission (2023), Country Report Lithuania 2023, SWD(2023) 615 final. 

12 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

structural decline of labour supply, which puts additional upward pressure on wages. Investments in 
skills and health could help increase participation or improve the quality of the labour force facing 
such  a  structural  decline.  With  shortages  of  specialists  of  both  medium  and  high  skill  and  low 
participation rates in adult learning, there is ample room for productive investment in skills which 
would  help  improve  the  employment  opportunities  of  the  low-skilled  and  alleviate  the  broader 
labour  supply  problem.  Equally,  the  comparatively  poor  health  of  the  Lithuanian  population  (see 
Lithuania  2023  Country  Report)  contributes  to  absenteeism  and  limits  the  potential  of  the 
population  around  retirement  age.  As part  of its  Recovery  and  Resilience  Plan,  Lithuania  plans to 
allocate around EUR 118 million for adult learning and improvement of labour skills. The Lithuanian 
plan includes several measures in this area, for example: the creation of a one-stop shop lifelong 
learning platform based on the principle of individual learning accounts; facilitation of the greater 
apprenticeships  opportunities;  increasing  employment  support  in  view  of  the  digital  and  green 
transition; investments on training of workers in specific sectors such as healthcare and long-term 
care, and the public sector are also included. In the area of healthcare, Lithuania plans to reform its 
long-term  care  provision  system  as  part  of  the  Recovery  and  Resilience  Plan,  which,  once 
successfully implemented, might increase labour force participation rates. 

Lending  regulations  as  well  as  capital  buffer  requirements  were  tightened  in  2022  in 
response  to  increasing  systemic  risks.  However,  Lithuania  does  not  make  full  use  of 
immovable  property  taxation,  which  could  dampen  real-estate  cycles.  Lithuania  has  a 
relatively  generous  real  estate  taxation  system,  characterised  by  low  yearly  tax  rates  applied  to 
residential properties, a small tax base and low tax on the transfer of the title. Capital gains from 
selling  owner-occupied  houses  are  not  taxed.  In  2021,  revenues  from  property  taxes,  which  are 
among the taxes least detrimental to growth, amounted to only 0.3% of GDP, around seven times 
lower than the EU average. Currently, as part of its Recovery and Resilience Plan, the government is 
considering  changing  the  model  of  taxation  of  non-commercial  immovable  property  owned  by 
individuals – to expand the residential real estate tax base and to move from taxation based on the 
total  value  of  real  estate  (as  a  wealth  tax)  to  a  classical  real  estate  tax  model  where  individual 
immovable  property  objects  are  taxed  separately.  However,  it  is  not  yet  clear  how  this  new  real 
estate taxation model would affect prices and volatility of the housing market. Home ownership is 
also  supported  by mortgage  guarantees  offered  to certain population  groups,  like young  families 
living in less developed regions. Mortgage interest deductibility was abolished in 2009. In response 
to  the  projected  economic  downturn,  in  2022  Lithuania  has  tightened  some  capital  buffer  and 
mortgage  lending  requirements.  Banks  and  other  financial  institutions  will  have  to  accumulate  a 
1% countercyclical capital buffer until October 2023, which should help to increase the resilience of 
important  financial  institutions  in  Lithuania  to  shocks  and  reduce  the  probability  of  their 
bankruptcy (30). Furthermore, in 2022 the loan-to-value ratio has been reduced to 70% for second 
and  subsequent  housing  loans.  This  regulation  is  expected  to  help  to  develop  a  responsible 
borrowing practice by preventing households from becoming overindebted. 

Conclusion 

In  Lithuania,  vulnerabilities  relating  to  price  competitiveness,  external  balances  and 
house  price  developments  are  increasing  but  seem  to  be  contained.  The  economy  was 
strongly  hit  by  the  energy  price  shock;  however,  Lithuania’s  price  competitiveness  is  projected  to 
slowly  recover  together  with  decreasing  energy  prices,  without  posing  external  sustainability 
challenges.  Lithuania’s  exports  have  so  far  not  been  strongly  affected  by  the  domestic-origin 

(30)  Central Bank of Lithuania, ‘Role of the Bank of Lithuania in maintaining financial stability’, More: https://www.lb.lt/en/role-

of-the-bank-of-lithuania-in-maintaining-financial-stability#ex-1-4  

13 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

inflationary pressures. Thus, once energy prices decrease, this should feed through to lower export 
prices  as  well  as  improving  Lithuania’s  trade  balance.  The  trade  balance  in  volumes  already 
improved somewhat in 2022 but deteriorated in value terms almost exclusively due to increased 
energy  import  prices.  The  worsening  of  the  current  account  balance  in  2022  was  also  due  to  an 
increasingly negative energy trade balance. Going forward, the mild current account deficits will not 
compromise  external  sustainability  given  Lithuania’s  sound  stock  position.  House  prices  are  now 
likely to undergo a period of moderation, given the interest rate rises and the economic slowdown 
underway. Moreover, the household  debt is low and the financial sector is well capitalised, highly 
profitable and benefits from currently low NPLs. Due to population ageing, the Lithuanian economy 
is  facing  a  structural  decline  of  labour  supply,  which  might  impair  its  competitiveness  over  the 
medium term if unaddressed. 

The policy setting is overall favourable in light of the identified vulnerabilities, although 
some  specific  structural  policies  could  help  to  manage  price  pressures.  The  authorities’ 
policy response to the energy price shock helped to preserve households’ purchasing power in the 
situation  of  high  inflation.  The  Lithuanian  government  managed  to  react  swiftly  to  the  external 
energy  price  shock,  which  hit  Lithuania  much  more  heavily  than  most  other  EU  economies. 
Electricity and gas price caps for households, VAT compensations for heating of residential houses, 
increases in social benefits, pensions and minimum wages helped to preserve households’ income 
and  purchasing  power  in  the  situation  of  high  inflation.  However,  as  energy  price  compensation 
measures were untargeted and relatively generous, it led to an increase in the general government 
deficit. Furthermore, temporal electricity price caps have been applied to businesses in all sectors, 
even though most production sectors seem to have successfully passed increasing production costs 
to  consumers  and  generated  increasing  profits  in  2022.  In  the  situation  of  low  intensity  of 
competition  on  domestic  markets,  untargeted  general  government  support  for  businesses  might 
have further increased profits with only a limited effect  on prices. Going forward, certain policies 
could help to better address the risks stemming from the negative trends identified in this report. In 
particular,  Lithuania  does  not  make  full  use  of  immovable  property  taxation,  which  could  also 
dampen  real-estate  cycles.  More  focus  on  some  specific  structural  policies  could  also  help  to 
manage  price  pressures,  such  as  fostering  competition  in  the  domestic  market,  increasing  local 
energy production and energy efficiency. Rising ULCs could be addressed by either improving labour 
supply – through investments in the skills and health of the population  – or through investments 
into innovation, thus supporting the transition to a high value-added economy. 

Based on the findings in this in-depth review, the Communication “European Semester – 
2023  Spring  Package”   sets  out  the  Commission’s  assessment  as  to  the  existence  of 
imbalances or excessive imbalances in Lithuania, in line with Regulation 1176/2011. (31) 

(31)  European Commission (2023), European Semester Spring Package 2022, COM(2023) 600 final. 

14 

 
                                                 
Graph 2.3: Selected graphs: productivity, wage, and profit dynamics in tradable vs non-tradable 
sectors, Lithuania 

2. 

Assessment of macroeconomic vulnerabilities 

The tradable sector consists of agriculture and manufacturing. Labour productivity data is seasonally adjusted. 
Source: Eurostat, Statistics Lithuania, Bank of Lithuania calculations and European Commission services.   

15 

30%35%40%45%50%55%201120122013201420152016201720182019202020212022% of GDPd) Gross operating surpluses EU27_2020EELVLT-2%3%8%13%AgricultureIndustryManufacturingConstructionTradeICTFinanceReal estateProfessional servicesPublic administrationArts & entertainmentc) Contribution to growth in VA, Q42022 vs Q42019wagesprofits4006008001000120014001600180020002008Q12009Q12010Q12011Q12012Q12013Q12014Q12015Q12016Q12017Q12018Q12019Q12020Q12021Q12022Q1EURb) Average monthly wage dynamics in main tradables and nontradables sectors (2008-2022)Total economyManufacturingConstruction90110130150170201520162017201820192020202120222015=100a) Changes in labour productivity and real wages in the non-tradable and tradable sectorsLabour productivity in the tradable sectorLabour productivity in the non-tradable sectorReal wages in the tradable sectorReal wages in the non-tradable sector  
 
Graph 2.4: Selected graphs: current account, external trade and NIIP dynamics, Lithuania 

2. 

Assessment of macroeconomic vulnerabilities 

graph d: private sector data not available for 2022  
Source: Eurostat, European Commission services 

16 

80901001101201301401502014Q12014Q32015Q12015Q32016Q12016Q32017Q12017Q32018Q12018Q32019Q12019Q32020Q12020Q32021Q12021Q32022Q12022Q3Index (2015=100)c) Exports and imports deflators over 2015-2022 EXPIMP-10-50510152013Q314Q315Q316Q317Q318Q319Q320Q321Q322Q3Change in pp. of GDP (y-o-y)e) Decomposition of NIIP  changeValuation changesNet transaction effect (rest FA bal.)Investment income effectNominal growth effectChange in NIIP (y-o-y)-7-5-3-11357-80-60-40-2002040608020152016201720182019202020212022bn of national currencyb) Decomposition of exports (X) and imports (M)M, const prices, inversedX, constant pricesM, price impact, inversedX, price impactX-M, current prices, rhsX-M, constant prices, rhs-30-25-20-15-10-5051015202122232425*26*27*28*29*30*31*32*% of GDPf) NIIP projectionsScenario 1Scenario 2Baseline-100-5005016171819202122% of GDPd) NIIP by sectorGeneral governmentPrivate sectorMFI (excl central bank)Central bank (incl reserves)Net international investment position (NIIP)NENDI-20-100102015161718192021222223*24*% of GDPa) Current accountGoods, fcastServices, fcastGoods excl energyEnergy balanceServices excl travelTravel balancePrimary inc. bal.Second. inc. bal.Current accountNet lending/borrowing  
 
2. 

Assessment of macroeconomic vulnerabilities 

Box 1: Inflation exposures and cross-border pass-through 

This box sheds light on the sources of inflation in Lithuania and its spill-overs with EU 
partners.  The  period  since  2021  has  been  characterized  by  pandemic  aftershocks  and  global 
supply  chain  disruptions  compounding  global  inflationary  pressures  and  a  surge  in  commodity 
prices  triggered  by  Russia’s  war  of  aggression  against  Ukraine.  As  a  result,  inflation  in  Lithuania 
surged to unprecedented levels. In response, wages and profits also picked up across the EU, which 
further  added  to  price  pressures  in  Lithuania.  With  input-output  data,  domestic  inflation  can  be 
decomposed  into  the  contributions  from  key  cost  factors.  Taking  into  account  some  data 
limitations, the framework can be  used to attribute consumer and investment price changes to i) 
extra-EU import price changes, which include both directly imported inflation and inflation passed 
through from EU partners import costs ii) domestic unit labour cost changes iii) domestic unit profit 
changes, including indirect taxation changes and iv) rest-of-EU value added price changes. (32) 

Data  suggests  that  much  of  inflation  in  Lithuania  in  2022  reflected  surging  energy 
prices, whereas non-energy imports are projected to keep inflation elevated in 2023. In 
2022, as shown in Graph 2.5, energy prices were a key driver of consumer and investment inflation. 
The  contribution  from  inflation  passed  through  EU  partners,  both  import  cost  as  well  as  value 
added,  was  considerably  smaller.  The  contribution  from  domestic  value-added  inflation,  which 
covers wages and profits, was and is expected to remain sizeable in 2023. This reflects increases in 
both, unit profits and unit labour cost in 2022 and 2023. The impact of energy inflation is set to 
decrease inflation this year, as prices of energy commodities have fallen. By contrast, non-energy 
imports  from  outside  the  EU  are  expected  to  keep  both  consumer  and  investment  inflation 
elevated.  Spill-overs  from  inflation  in  other  EU  countries  are  set  to  remain  marginal.  In  2024, 
domestic  inflation  is  projected  to  fall  further  on  account  of  both,  a  lower  contribution  from 
domestic wages and profits as well as imports. 

Graph 2.5: Components of gross fixed capital formation deflator growth and consumer price 
inflation 

Source: European Commission services 

(32)  The graphs below are based on national accounts data and the Commission’s Spring 2023 forecast, combined with 

Eurostat input-output data. HICP is taken as the measure of the price of private consumption, including non-residents. 
Changes in import prices and value-added deflators are assumed to affect demand prices with a delay of 2 and 1 months 
for consumption and investment inflation, respectively. For further methodological details, see explanations in the 2023 in-
depth review for Czechia, p. 16. 

17 

-15-10-505101520161718192021222324% change (year-on-year)LT: contribution to domestic GFCF deflator growth-10-50510152025161718192021222324% change (year-on-year)LT: contribution to domestic CPI deflator growthDomestic ULCUnit profits (&taxes)RoEU value added deflatorEnergy imports from Extra-EUOther imports from Extra-EURoEU import cost passthr.ResidualDeflator growth YoY 
  
 
                                                 
Table 2.1: Selected economic and financial indicators (Part 1), Lithuania 

2. 

Assessment of macroeconomic vulnerabilities 

(e) estimate based on ECB quarterly data 
(1) Potential output is the highest level of production that an economy can reach without generating inflationary 
pressures. The methodology to compute the potential output is based on K. Havik, K. Mc Morrow, F. Orlandi, C. Planas, R. 
Raciborski, W. Roeger, A. Rossi, A. Thum-Thysen, V. Vandermeulen, The Production Function Methodology for Calculating 
Potential Growth Rates & Output Gaps, COM, European Economy, Economic Papers 535, November 2014. 
(2) Deviation of actual output from potential output as % of potential GDP. 
(3) Current accounts in line with fundamentals ("current account norms") are derived from reduced-form regressions 
capturing the main determinants of the saving-investment balance, including fundamental determinants, policy factors 
and global financial conditions. See L. Coutinho et al. (2018), "Methodologies for the assessment of current account 
benchmarks", European Economy, Discussion Paper 86/2018, for details.  
(4) This benchmark is defined as the average current account required to halve the gap between the NIIP and the 
indicative MIP benchmark of -35% of GDP over the next ten years, or to stabilise the NIIP at the current level if it is 
already above the indicative MIP benchmark. Calculations make use of Commission’s T+10 projections. 
(5) NENDI is a subset of the NIIP that abstracts from its pure equity-related components, i.e. foreign direct investment 
(FDI) equity and equity shares, and from intracompany cross-border FDI debt, and represents the NIIP excluding 
instruments that cannot be subject to default. 
(6) Fundamentals-based benchmarks are derived from regressions capturing the main determinants of credit growth and 
taking into account a given initial stock of debt. Prudential thresholds represent the debt threshold beyond which the 
probability of a banking crisis is relatively high, minimising the probability of missed crisis and that of false alerts. 
Methodology to compute the fundamentals-based and the prudential benchmarks based on Bricongne, J. C., Coutinho, L., 
Turrini, A., Zeugner, S. (2019), “Is Private Debt Excessive?”, Open Economies Review, 1- 42. 
Source: Eurostat and ECB as of 2023-04-28, where available; European Commission for forecast figures (Spring forecast 
2023) 

18 

all variables y-o-y % change, unless otherwise stated2003-072008-122013-18201920202021202220232024Real GDP 8.7-0.43.34.60.06.01.90.52.7Potential growth  (1)6.21.82.34.34.14.53.52.92.6Contribution to GDP growth:Domestic demand 11.6-3.53.83.0-1.86.50.90.72.8Inventories 0.2-0.1-0.3-1.6-1.8-0.20.70.0-0.1Net exports -3.12.8-0.23.23.5-0.30.2-0.10.1Contribution to potential GDP growth (1):Total Labour (hours) -0.1-0.70.20.60.41.20.90.40.1Capital accumulation 2.51.11.31.81.61.81.71.61.6Total factor productivity 3.81.40.81.92.11.50.90.80.9Output gap (2)4.1-4.41.23.7-0.31.1-0.5-2.7-2.6Unemployment rate8.413.28.86.38.57.16.06.66.5Harmonised index of consumer prices (HICP)2.44.71.32.21.14.618.99.22.2GDP deflator 4.83.32.62.71.96.316.810.43.1External positionCurrent account balance (% of GDP), balance of payments-9.4-3.20.43.57.31.1-5.1-0.90.1Trade balance (% of GDP), balance of payments-8.7-3.51.25.39.34.5-2.0..Primary income balance (% of GDP)-2.4-1.5-2.9-3.5-2.9-3.8-3.3..Secondary income balance (% of GDP)1.81.82.11.70.90.50.2..Current account explained by fundamentals (CA norm, % of GDP) (3)-1.20.30.60.60.60.50.30.10.1Required current account to stabilise NIIP above -35% of GDP over 20Y (% of GDP) (4)-3.5-4.3-4.1-3.0-2.4-1.7-1.5-1.4-1.2Capital account balance (% of GDP)1.13.32.21.71.71.41.5..Net international investment position (% of GDP)-44.2-56.5-41.9-23.5-15.7-7.4-6.7..NENDI - NIIP excluding non-defaultable instruments (% of GDP) (5)-15.4-25.6-11.95.615.122.321.5..Net FDI flows (% of GDP)-3.3-1.1-0.9-2.3-1.1-2.2-2.5..CompetitivenessUnit labour costs (ULC, whole economy)5.60.65.46.34.96.814.09.13.1Nominal compensation per employee 13.92.66.610.66.611.910.610.46.2Labour productivity (real, hours worked)6.72.52.13.96.13.1-3.30.72.0Real effective exchange rate (ULC)3.5-1.53.43.90.76.29.62.8-0.6Real effective exchange rate (HICP)1.21.90.90.11.51.87.9..Export performance vs. advanced countries (% change over 5 years)63.039.59.314.439.544.2...Private sector debtPrivate sector debt, consolidated (% of GDP)52.672.155.855.254.353.951.6..Household debt, consolidated (% of GDP)14.928.022.323.024.223.622.1..Household  debt, fundamental benchmark (% of GDP) (6)6.410.111.113.514.814.915.8..Household  debt, prudential threshold (% of GDP) (6)74.876.273.787.758.153.252.1..Non-financial corporate debt, consolidated (% of GDP)37.744.033.532.330.230.429.5..Corporate debt, fundamental benchmark (% of GDP) (6)38.243.749.047.950.248.848.8..Corporate debt, prudential threshold (% of GDP) (6)93.7102.893.8100.674.772.470.9..Private credit flow, consolidated (% of GDP) 14.4-1.32.62.60.35.96.7e..Corporations, net lending (+) or net borrowing (-) (% of GDP)-7.06.16.06.211.72.6-3.51.82.1Households, net lending (+) or net borrowing (-) (% of GDP)-0.70.1-3.1-1.54.31.0-0.1-0.10.2Net savings rate of households (% of net disposable income)-1.20.1-3.00.19.12.2...forecast 
     
 
 
 
 
Table 2.2: Selected economic and financial indicators (Part 2), Lithuania 

2. 

Assessment of macroeconomic vulnerabilities 

(7) Unweighted average of price-to-income, price-to-rent and model valuation gaps. The model valuation gap is 
estimated in a cointegration framework using a system of five fundamental variables; total population, real housing 
stock, real disposable income per capita, real long-term interest rate and price deflator of final consumption expenditure, 
based on Philiponnet, N., Turrini, A. (2017), "Assessing House Price Developments in the EU," European Economy - 
Discussion Papers 2015 - 048, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission. 
Price-to-income and price-to-rent gaps are measured as the deviation to the long term average (from 1995 to the latest 
available year). 
(8) Price-to-income overvaluation gap measured as the deviation to the long term average (from 1995 to the latest 
available year). 
(9) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 
Source: Eurostat and ECB as of 2023-04-28, where available; European Commission for forecast figures (Spring forecast 
2023) 

19 

all variables y-o-y % change, unless otherwise stated2003-072008-122013-18201920202021202220232024Housing marketHouse price index, nominal19.3-5.55.56.87.316.119.0..House price index, deflated16.8-9.94.34.56.111.00.3..Overvaluation gap (%) (7)22.12.3-14.2-13.7-13.1-4.7-1.7..Price-to-income overvaluation gap  (%) (8)21.8-0.2-16.9-18.4-19.1-10.0-8.7..Residential investment (% of GDP)2.22.52.73.03.23.03.6..Government debtGeneral government balance (% of GDP)-0.8-6.2-0.40.5-6.5-1.2-0.6-1.7-1.4General government gross debt (% of GDP)18.031.139.035.846.343.738.437.136.6Banking sectorReturn on equity (%)13.4-1.811.815.18.811.4...Common Equity Tier 1 ratio8.910.412.815.418.823.5...Gross non-performing debt (% of total debt instruments and total loans and advances) (9)0.711.94.91.61.30.7...Gross non-performing loans (% of gross loans) (9)..4.41.72.21.21.0..Cost of borrowing for corporations (%)..2.52.92.62.74.7..Cost of borrowing for households for house purchase (%)..2.12.42.22.14.4.. 
     
 
 
 
Table 2.3: Selected housing market indicators, Lithuania 

2. 

Assessment of macroeconomic vulnerabilities 

(') Forecast. The forecast of house prices is computed on the basis a housing valuation model shared with Member States 
in the context of the EPC LIME working group. The forecasts represent real house price percentage changes expected 
based on economic fundamentals (population, disposable income forecast, housing stock, long-term interest rate, and the 
price deflator of private final consumption expenditure), as well as the error correction term summarising the adjustment 
of prices towards their long-run relation with fundamentals. The source for the forecast of other variables is Ameco. 
(1) Price to income in level is the number of years of income necessary to buy an assumed 100m2 dwelling. See 
Bricongne, J-C, A Turrini, and P Pontuch, 2019, “Assessing House Prices: Insights from HouseLev, a Dataset of Price Level 
Estimates”, Discussion Paper 101, European Commission, available in "https://ec.europa.eu/info/publications/assessing-
house-prices-insights-houselev-dataset-price-level-estimates_en".  
(2) Price to income and price to rent gaps are measured in deviation to the long term average (from 1995 to the latest 
available year).  
(3) The model valuation gap is estimated in a cointegration framework with nominal house prices as the dependent 
variable and five fundamental explanatory variables:  total population, real housing stock, real disposable income per 
capita, real long-term interest rate and price deflator of final consumption expenditure. See Philiponnet and Turrini, 
Assessing House Price Developments in the EU (2017) available in "https://ec.europa.eu/info/publications/economy-
finance/assessing-house-price-developments-eu_en" and revision notes presented to LIME in October 2019 and June 
2020.  
(4) The average house price gap is the simple average of the price-to-inome, price-to-rent and model valuation gaps.  
Sources: Sources: Eurostat, OECD, ECB, BIS, Ameco, national sources, European Commission calculations. 

20 

2003-072008-122013-18201920202021202222Q122Q222Q322Q4House price developmentsUnitSourceReal house price, yoy growth%(a)16.9-8.94.34.56.111.00.34.93.0-1.8-4.5Nominal house price, yoy growth%(a)19.6-4.45.56.87.316.119.019.122.119.316.0Price to income in level (1)years(b)12.09.88.28.08.08.99.09.38.98.89.0Rent price developmentsSourceNominal rent price index2015=100(a)44.672.399.6126.1129.4131.8153.0162.9164.6165.4166.0Nominal rent price, yoy growth%(a)14.63.88.97.72.61.816.137.739.739.840.7Valuation gapsPrice to income gap (2)%(c)21.8-0.2-16.9-18.4-19.1-10.0-8.7-6.6-7.9-8.7-10.9Price to rent gap (2)%(c)32.90.4-20.0-21.6-18.0-6.6-4.2-2.5-3.6-4.1-6.2Model valuation gap (3)%(c)11.66.7-5.7-1.1-2.32.47.87.98.28.57.1Average house price gap (4)%(c)22.12.3-14.2-13.7-13.1-4.7-1.7-0.4-1.1-1.4-3.3Housing creditBank mortgages (% GDP)%(d)10.919.816.817.218.418.217.2Bank mortgages, yoy growth%(d)69.84.44.88.68.511.612.7Housing supply0.00.00.00.0Residential construction - dwellings  (% GDP)%(e)2.22.52.63.03.23.03.6Residential construction - dwellings, yoy growth%(e)38.2-1.98.614.75.8-0.218.2Non-residential construction (% GDP)%(e)11.89.28.18.78.58.28.0Value added in the construction sector, yoy growth%(e)47.8-6.65.17.5-0.33.01.3Building permits index2015=100(a)91.772.8104.3109.8111.0142.7117.0126.0140.3110.391.2Building permits, yoy growth%(a)35.7-6.88.4-5.51.128.6-18.0-20.21.9-15.5-36.9Number of transactions, yoy change%(f)Other housing market indicatorsShare of owner-occupiers, with mortgage or loan%(a)4.57.29.612.214.016.6 
        
 
 
 
Table 2.4: Selected household debt indicators, Lithuania 

2. 

Assessment of macroeconomic vulnerabilities 

(f) European Commission forecast,. (1) Gross non-performing bank loans and advances to Households and non profit 
institutions serving households (% of total gross bank loans and advances to Households and non profit institutions 
serving households). (2)  Quarterly data is annualized. 
Source: (a) Eurostat, (b) Ameco, (c) European Commission calculations, (d) ECB. 

21 

2003-072008-122013-20202120222023fSourceStocksDebt, consolidated (% of GDP)(a,d)152823242222Debt, consolidated (% of potential GDP)(a,b,d)Prudential threshold (% of GDP)(c)757373535253Fundamental benchmark (% of GDP)(c)61012151617Debt (% of gross disposable income)(a,b,d)234236393737Interest paid (% of gross disposable income) (2)(a,b)0.61.40.50.4Debt (% of gross financial assets)(a,d)19.833.024.620.1Share of variable rate loans for house purchase (%)(d)90.376.687.7Domestic  loans in forex (% of adjusted dom. loans)(d)0.71.00.60.20.2Adjusted domestic  loans (% of gross disposable income)(d)25.239.833.835.834.0Loans for house purchase (% of gross disposable income)(d)16.929.727.229.828.6FlowsCredit flows (% of gross disposable income) (2)(a)9.00.02.13.72.31.9Loans for house purchase (% gross disposable income)(a,b)8.11.11.63.13.2Benchmark for flows (% of GDP)(c)1.80.51.60.7-0.2-0.3Savings rate (% gross disposable income)(b)3.14.02.75.83.94.0Investment rate (% gross disposable income)(b)6.05.06.74.85.25.3p.m. Bank HH NPLs (% of HH loans)(1)(d)4.41.0