Lithuania

In 2025, Lithuania's economy showed uneven but strong growth. This reflects earlier inventory accumulation and a soft patch in goods exports over the summer amid subdued demand and unit labor costs, followed by renewed momentum from public investment and resilient service activity. Private consumption continued to drive growth, driven by robust wage growth and spending on durables. Meanwhile, government consumption strengthened in the second half, supported by RRF-related projects and defense expenditures. Conversely, net trade contributed negatively to the year's growth, as goods exports were impacted by weak EU demand and competitiveness pressures. This was offset by services exports and a positive contribution from inventories. In 2026, growth is projected at +2.5%, driven by infrastructure and non-residential investment, improved external demand and a gradual normalization of private consumption.

Inflation averaged 3.76% in 2025. Price dynamics were shaped by energy and food components, while services inflation eased into the end of the year as unit wage pressures moderated. In 2026, inflation is expected to decline to 2.5%, reflecting fading energy shocks, stabilizing supply chains and a more balanced services price profile, despite some lingering effects from excise/tax changes and network-cost reallocation in retail energy tariffs.

Labor market conditions softened slightly but remained tight. Manufacturing employment eased, while public services expanded, consistent with policy priorities. Unemployment is relatively low by European standards (with Commission projections pointing to ~6.8% in 2025 and ~6.6% in 2026), yet skills mismatches remain high. This keeps nominal wage growth buoyant but pressuring cost competitiveness as wages outpace productivity. Positive net migration and the diffusion of digital and AI technologies can mitigate demographic drag and support productivity, provided that upskilling and access to finance for firm investment are strengthened.

Lithuania’s corporate sector combines dynamism with underlying structural frictions. A vibrant technology ecosystem — including several unicorn-status firms — coexists with a broad base of SMEs still constrained by limited access to funding, high input costs and skills shortages. Business insolvencies declined by roughly 1% in 2025 and are expected to remain broadly flat in 2026, still well below the 2016–2019 average. This resilience reflects labor-hoarding, public-investment support and still-benign credit conditions. However, latent vulnerabilities stemming from reliance on bank financing, shallow capital markets and elevated unit labor costs could surface should external demand weaken or financing conditions tighten.

The broader business environment remains supportive. Lithuania ranks 16th globally in the 2025 Index of Economic Freedom (score 74.6; “mostly free”), reflecting strengths in regulatory efficiency, trade openness and competitive taxation. These factors continue to offset cyclical pressures and support investment and innovation activity. Sustaining this resilience will require progress in capital-market deepening, R&D incentives and workforce upskilling — all critical to lifting productivity and keeping business failures structurally low over time.

Lithuania’s financial structure amplifies some medium-term risks. The financial system remains bank-centric, with equity market capitalization at around 6% of GDP versus close to 70% on average in the EU, leaving firms highly dependent on bank credit. Concentration in the banking sector and limited development of non-bank financing channels heighten sensitivity to interest-rate cycles and could constrain investment as defense-related borrowing rises. While banks are currently well capitalized and liquid, deeper participation by institutional investors and broader market instruments will be necessary to diversify funding sources. EU funds and rapid growth in renewables/storage projects have helped cushion liquidity pressures, but the post-2026 tapering of EU inflows and large-scale grid investment needs could expose funding gaps unless market financing steps in more decisively.