Economic Outlook

1. Economic performance in 2013 was solid, with real GDP growth of 3.3 percent, one of the highest in the EU. Domestic demand drove the expansion, while exports held up well in a difficult external environment. Recovering investment and rising employment—together with a balanced external position—are welcome developments. Inflation declined to 1.2 percent, reflecting well-contained domestic price pressures and subdued international and global commodity prices.

2. Growth is projected to pick up to 3½ percent in 2014. Domestic demand will likely remain the main driver—employment and wage growth supporting private consumption, and high capacity utilization and new territorial planning rules underpinning investment. Inflation is set to remain low (1 percent) and the current account broadly balanced. Real GDP would exceed 2008 levels for the first time, but now free of unsustainable excess. Beyond 2014, growth should rise to its estimated potential rate of 3¾ percent, but this will be contingent on sustained investment and staying the course of reforms and disciplined policy making.

3. The balance of risks around this generally favorable outlook is tilted to the downside, primarily due to global factors. Important external trade and financial linkages make Lithuania susceptible to spillovers from abroad, although the balanced external position and the absence of domestic overheating provide a degree of protection. Tapering of unconventional monetary policy in the U.S. has had few domestic repercussions so far. On the domestic front, the recent revival of investment could yet fizzle out for lack of credit.

Euro adoption plans—the next logical step on Lithuania’s European integration path

4. Lithuania seems well placed for euro adoption, regarding entry criteria, sustainability of low inflation and public finances, and external stability. Two decades of currency board arrangement have attuned the economy to operating well without an independent monetary policy....