Baltic economies face weak growth and high inflation

By: News Team

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Baltic economies face weak growth and high inflation

The economies of the Baltic states – Latvia, Estonia and Lithuania – are facing weak or negative growth rates in the first half of 2023 which, coupled with high food and energy prices, are already impacting households in the region.

“I don’t expect much in terms of growth this year: Estonia and Latvia are in recession, while Lithuania has so far resisted better,” Morten Hansen, head of the economics department at the Stockholm School of Economics in Riga (SSERiga), told EFE.

In a recent analysis, Bank of Estonia economist (Eesti Pank) Kaspar Oja wrote that the country’s economy contracted by 1.3% in 2022, with a 4.1% year-on-year drop in the last quarter of the year.

According to the expert, “household consumption was lower in the fourth quarter than a year ago, but the main source of the decline was the export sector” due to several factors, such as higher energy prices, less access to raw materials and weaker demand in foreign markets.

However, he stressed that “the economy is in a weaker position than before, but looking further back, its position is close to the average of the economic cycle, and the peaks it reached recently were more indicative of overheating.”

Regarding Latvia, the Ministry of Finance forecast in mid-March that in 2023 the gross domestic product (GDP) will remain at last year’s level, but growth of 2% is expected in 2024.

In Latvia, the 9.8% drop in industrial production in January, the steepest decline since October 2009, according to the Central Statistical Office (CSB), was a shock.

“January’s industrial data is tough, although the real picture is not as bad as it seems at first glance,” said Pēteris Strautiņš, senior economist at Latvia’s Luminor Bank.

He spoke of a “first sigh of relief” by noting that “manufacturing contracted ‘only’ by 6.1%.”

“The fact that energy consumption decreased by 20.8% does not cause much concern” and may be due to good weather, savings, good insulation or that “instead of producing expensive electricity with imported gas, we import slightly cheaper electricity from neighboring countries.”

He said that “none of this threatens Latvia’s economy.”

By sector, Strautiņš noted that “there are also industries that have risen a lot and continue to grow” such as electronics, which rose 44.3% year-on-year in January.

The negative factors for the Latvian economy in general, according to Hansen, “fewer exports to Russia, higher interest rates – and they will rise even more – high inflation that erodes purchasing power and, possibly, less investment due to the wait-and-see attitude to war.”

A survey of economists conducted by Latvian media also revealed that most believe inflation will fall below the 20% level it has been at since July 2022.

SEB Bank (EPA:SEBF) of Swedish-owned Lithuania is cautiously optimistic about inflation in its most recent economic forecast, end-2022.

“Although inflation will decrease in the first half of the year, it will be higher than the variation in household income, so households will consume less than a year ago. The second half of the year should already be much more positive for both the European and Lithuanian economies,” he said.

He added that “the peak of interest rates in the euro zone and in Lithuania is not far away.”

“Lithuania has been more resilient than the other two Baltic countries. We estimate that despite the multitude of challenges, GDP grew by 2.4% in 2022,” Swedbank wrote in Sweden in its January economic forecast for the Nordic and Baltic region.

He added that “while some of the biggest challenges appear to be behind us, the loss of purchasing power, higher interest rates and weak export markets will take their toll on economic activity this year.”

“The good news is that price pressures are receding rapidly, and annual inflation is likely to fall to about 2% by the end of this year,” he predicted.

On the optimistic side for the region as a whole, Hansen alluded to the billions being made available in European Union recovery and resilience funds, military spending and spending on the construction of the Baltic Railway, which crosses the three countries from north to south.

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