Why is the Lithuanian economy diving headlong into the abyss?

 

This analysis accurately diagnoses the main problems of the Lithuanian economy in 2025, which arise from global political fractures and long-standing internal structural flaws.

 

Here are the main reasons why the Lithuanian economy is currently experiencing such great pressure:

 

1. Global “Tariff War” and Market Overcrowding

 

The tariffs imposed by the Donald Trump administration on the US market have forced Asian manufacturers (China, Vietnam) to massively redirect their production to the EU. Lithuania, being an open export economy, is facing a double blow:

 

Slowdown in German industry: Most of Lithuania’s production is integrated into German supply chains. When German giants withdraw due to cheap Asian competition, Lithuanian orders fall first.

 

Dumping pressure: As cheaper goods flood into Europe, local manufacturers cannot compete on price, as their costs are inflated by energy and wages.

 

2. Industrial stagnation vs. service bubble

 

As you correctly note, the EU economy has been growing “on services” over the past five years, not on the foundations of production. This is dangerous for Lithuania because:

 

In the structure of Lithuania’s GDP, industry occupies a much larger share than the EU average.

 

When the industrial production index stagnates, the “service economy” (restaurants, entertainment) cannot maintain the country’s prosperity for a long time, because industry is the main currency importer into the country.

 

3. Suicidal cost structure

 

Lithuanian business has fallen into a “scissors” between rising costs and falling income:

 

Wages vs. productivity: Wages in Lithuania have grown at one of the fastest rates in the EU in recent years due to business-threatening emigration to the West, but employee efficiency (productivity) has not increased that much. This makes Lithuanian goods too expensive for export markets.

 

Energy: Although energy prices have stabilized compared to 2022, crisis, they remain structurally higher than in the US or Asia due to sanctions against Russia, which takes away the competitive advantage of energy-intensive industries (fertilizers, wood, metal processing).

 

Expensive money: High interest rates (Euribor) are stopping investments in robotization. Companies that should modernize in order to survive are now giving all their money to banks for loans.

 

4. Geopolitical “isolation”

 

Due to geopolitical tensions, Lithuania is often seen as a “high-risk zone” in the eyes of investors. This leads to:

 

More expensive borrowing for businesses.

 

More cautious foreign investments in new factories.

 

Conclusion: The Lithuanian economy is really “diving in the abyss” because it is undergoing a painful transformation. The old model – “cheap gas from the East + cheap labor + orders for the West” – is finally dead. 2025 is the year when companies that have not had time to invest in high added value will be forced to retreat, making way for more efficient players, but this process will be very painful socially (layoffs, bankruptcies).

 

More information about Lithuania's economic forecasts and business environment can be found on the website of the Bank of Lithuania or the portal of the State Data Agency.

 

“The year ending 2025 was marked by a turning point in trade policy globally. The United States’ tariff decisions, taken under Donald Trump, fundamentally changed international trade flows. With the US market closed to some products, goods from China, Vietnam and other Asian countries were redirected to Europe, increasing competitive pressure on EU manufacturers.

 

We are not talking about a temporary correction here. Europe is becoming the main market for excess production capacity that cannot be accommodated elsewhere. The pressure on prices and margins is not due to a cyclical slowdown, but to a change in the global balance. This pressure is further strengthened by the long-term structure of the European economy itself. Between 2020 and 2025, the services sector volume index in the EU increased by about 30-33 points, construction by 25-28 points, while trade grew by only about 10-12 points, and the industrial production index by only about 10 points, effectively stagnating after 2022. This means that most of the growth in Europe over the past five years has been generated in services, not manufacturing.

 

In such conditions, any additional trade shock is primarily concentrated where growth was already weakest – in industry. This context has also directly affected Lithuanian industry.

 

In recent months, companies have recorded lower order flows from Germany and Scandinavia. Lithuanian industry, being strongly integrated into contract manufacturing chains, is feeling this pressure quickly.

 

Margins are being squeezed by several factors at once: • declining orders in key export markets, • increased borrowing costs and limited access to capital, • increased energy prices due to stupid sanctions, • rising wages not covered by productivity growth. Productivity growth remains insufficient, and for some companies, investments in more advanced equipment is becoming increasingly difficult to achieve. In this context, some businesses have been forced to reduce the number of jobs, and there is increasing talk of possible layoffs."