Lithuania: Recovery in investment should boost growth in 2017

​Real GDP growth decelerated to +1.7% y/y in Q3 2016, down from an average +2.1% in H1 and +1.8% in full-year 2015. This took the average of the first three quarters of 2016 to +2% y/y, which was mainly driven by domestic consumption and net exports. Consumer spending growth strengthened to +5.7% y/y and public spending was up by +1.1% y/y in Q1-Q3. Fixed investment decreased by -2.9% y/y and inventories subtracted -2.1pps from Q1-Q3 growth as the use of EU funds for investment fell markedly. However, export growth recovered to +3.9% y/y, outpacing imports at +2.7% y/) so that net exports added +0.9pps to Q1-Q3 growth. 

Looking ahead, investment should rebound in line with a recovery in the absorption of EU funding. Higher inflation is likely to dampen consumer spending somewhat but strengthening public spending thanks to rises in defense and social spending should compensate for this. Overall, full-year real GDP growth is forecast to accelerate from an expected +1.9% in 2016 to around +2.3% in 2017 and +2.5% in 2018. Further delays in the use of EU funds pose a downside risk to this forecast.