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International Internet Magazine. Baltic States news & analytics Friday, 29.03.2024, 11:10

Swedbank cuts economic growth forecast for Latvia and Estonia

BC, Riga, 14.04.2016.Print version
Analysts of Latvia’s Swedbank has cut the economic growth and inflation forecasts for Latvia in 2016. Swedbank also has lowered its economic growth forecast on Estonia to 2%, informs LETA/BNS.

Latvia’s economic growth forecast has been cut from 3.3% to 3%. The economic growth forecast for 2017 has remained at 3%, the bank’s senior economic Lija Strasuna told the press on Thursday.

 

Due to the drop of oil prices, this year’s inflation forecast has been cut to 0.2% from 0.8%. Next year a gradual rise in prices might resume – even to 2.8% compared to the earlier forecast of 2.3%.

 

Speaking about the situation in global economy, Swedbank’s chief economist Martins Kazaks said that there are no grounds for a very negative view on the world’s economy and there is a growth in general, but the situation in different economies differs.

 

Swedbank’s analysts expect that recession in Russia will end sooner than it was forecast earlier. Kazaks though said that nobody should expect wonders from Russia’s economy and it will not return to the pre-crisis level that soon. Latvian business representatives should not hope that they will be able to return in the Russian markets and achieve the earlier sales any time soon.

 

Swedbank’s base scenario provides for a moderate economic growth in the world, even though there are a number of negative risks and their probability is high.

 

Swedbank has lowered its economic growth forecast on Estonia for 2016 by 0.3 percentage points from the previous estimate to 2% and the estimate for 2017 by 0.1 point to 2.5%.

 

"Recent months have brought about successive downward revisions of the economic outlook in Europe; meanwhile, uncertainty and downward risks are still high. This is why we have made some downward revisions to Estonia's figures as well and expect that the economy grows 2% this year and 2.5% in 2017," the Swedbank Economic Outlook published on Thursday says.

 

"However, the story behind the outlook has not changed: we expect foreign demand and exports will improve sluggishly, consumer prices will start to increase this year, and the steep deceleration of the real growth of net wages will gradually slow consumption," it says.

 

Last year, exports of goods produced in Estonia decreased the most to the Swedish and Latvian markets, followed by the Belgian and Russian markets. In 2015, Estonia's export value increased in only four European countries – the Netherlands, the UK, Denmark, and Romania – out of the ten largest. Primarily, shale oil products, wood products, furniture, and electrical equipment contributed to the growth in these markets.

 

The survey points out that Russia is the weakest market among the major trade partners of Estonia. However, its share in the exports of Estonian origin dropped to only 2.8% in 2015 and thus had a relatively modest impact on the total economy. As the share of reexported goods to Russia through Estonia is very high, representing 71%, the decline of exports to this market has a negative impact on Estonian transport services.

 

The average import demand from Estonia's major trade partners is expected to improve, albeit still sluggishly, in 2016 and 2017; this will gradually create more export opportunities for Estonian enterprises. According to a Swedbank survey, among industrial companies, Estonian exporters in 2016 intend to increase their market share in export markets, focusing more on Germany, Denmark, and the UK, besides the Scandinavian countries, Swedbank said.

 

"Although the decline of total investments slowed towards the end of last year, business sector investments have not yet shown clear-cut improvement yet. The major negative impact came from the exceptionally smaller investments in transport equipment. We expect that the somewhat better outlookk for foreign demand will enhance the business sector's need for more investments," it said.

 

According to a Swedbank survey, the average volume of investments will increase, while the main focus will be on improving efficiency. More and more attention is being paid to product development, as well. The larger investments are expected in the food and wood industries. At the same time, the sluggish recovery of demand and prices, while labor costs are putting increasing pressure on business sector profitability, could inhibit a more robust growth of investments in the near future.

 

Inflation will be modest in 2016, as external price pressures remain subdued. Crude oil prices, in euro terms, will be below last year's level until the fourth quarter of 2016; this will suppress the prices of transportation and housing in Estonia. Changes in tax policy will push prices higher by an estimated 0.7 percentage point in 2016, as the excise tax on alcohol, tobacco, and fuels will be lifted. In 2017, price growth will accelerate to 2.6% as world market prices of commodities will rise and excise tax rates will be lifted again.

 

In 2016-2017, employment is expected to fall because of a smaller supply of as a result of a shrinking working-age population, and demand for labor, resulting from weak export demand and investments in machinery. A state reform will reduce the number employed in the public sector. A cutback in the number of public workers and the reorganization of the social benefits system for the disabled, forcing them to find jobs, will lift the number of unemployed, at least temporarily.

 

In accordance with that, the level of unemployment should move slightly higher in  both years, to respectively 6.5% and 6,7%.

 

Wage growth will remain fast, however, as the lack of suitable labor remains a concern. An agreed 10% increase in the minimum wage in 2016 and again in 2017 will lift the average wage level by around 0.5% each year. The growth of wages in real terms will slow in 2016-2017, as nominal growth of wages will be somewhat slower, to respectively 4.8% in 2016 and 5.5% in 2017. Prices will grow, and labor taxes will be lowered less than in 2015, which, in turn, will gradually limit households' consumption, the Swedbank Economic Outlook says.






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