Analytics, Economics, EU – Baltic States, GDP, Investments, Markets and Companies

"In the context of positive global trends, the Baltic countries and Lithuania look rather good. A recovering Russia and euro area have had a positive impact on Lithuania's GDP growth. Lithuania's GDP grew by 4% in the first half of this year and we expect similar growth for the rest of the year," Swedbank Lithuania's chief economist Nerijus Maciulis said at a news conference on Tuesday.

The upward revision of the 2017 GDP growth forecast reflects positive foreign trade trends, recovering investments and strong household consumption, he said.

Swedbank also revised its 2018 GDP growth projection upwards to 3.5%, from 2.7% in April. However, the bank forecasts that the country's economic growth will slow down to 2.5% in 2019.

Swedbank predicts that inflation in Lithuania will reach 3.5% this year (up from the 3% projection in April) before decelerating to 3% next year. It expects wages to grow by 8% in 2017 and by 7% in 2018.

Lithuania's exports are forecast to grow by 8% this year and by another 7% next year. Imports are expected to increase by 10% and 8%, respectively.

Swedbank expects unemployment in the country to decline by 7.2% this year, from 7.9% in 2016, and ease further to 6.8% next year.

According to Swedbank’s forecasts, Latvia’s economy this year and next year will grow by 4-4.2%, but the growth might slow down if there are no investments, said the bank’s chief economist Martins Kazaks, presenting the bank’s latest macroeconomic outlook.

"The earlier "fat years" will not return, but the "good new times" are here. The world’s economy is growing well, and the growth will not be steeper. Investments in Latvia’s economy are finally growing, but they are still very weak. We will not be able to grow without investments. If we do not invest today, we will miss tomorrow’s opportunities," said Martins Kazaks.

The economist underscored that Latvia’s gross domestic product rose steeply in the first half of this year – by 4.1%. Export growth is driven by a strong external demand, investments are recovering, while improvement of household sentiment and income promotes consumption rise.

"The economy is growing steeply, while demand for loans is still week – households and companies seemingly are not rushing with large purchases and investments. Lending will be important for growth," said Kazaks.

The economist said that, affected by external factors, the growing excise tax and wage growth, the average annual inflation will reach almost 3% in 2017 and 2018, and will be at 2.2% in 2019.

"The main risks for growth are external – uncertainty related to the geopolitical situation, weakening of external demand and reduction of Russian cargo transit flow. Internally, heating up of the job market and excessive wage growth might threaten competitiveness," said Kazaks.

Swedbank has raised Estonia's 2017 real growth forecast by 1.3 percentage points to 3.5% and next year's growth forecast by 0.4 percentage points to 3.2% in its fresh economic outlook.

In April the bank estimated Estonia's gross domestic product growth to total 2.2% this year and 2.8% in 2018. In 2019 the country's economic growth is to total 2.7%, the bank said on Tuesday.

Foreign demand is expected to remain robust in the next two years. In addition to the positive impact on exports, this increases the need for business sector investments, as capacity utilization in industry has already risen above its long-term average, Swedbank said.

After a slowdown this year, growth of private consumption is expected to accelerate again in 2018. The bank forecasts that next year the Estonian economy will grow by 3.2% and in 2019 by 2.7%. At this stage of the growth cycle, Estonia does not need stronger fiscal stimulation, the bank said.

Consumer price growth is expected to accelerate above 3% in 2017 due to higher commodity prices and a surge in excise tax rates. Strong wage growth will lift the prices of services. Growth of the average wage in real terms is expected to slow substantially this year, as nominal growth of wages will be somewhat slower and prices will rise.

The substantially slower growth of wage-earners' purchasing power will be smoothed by an increase in social transfers. In 2018, wage-earners' labor income will jump up again, due to a substantial increase in their nontaxable income. This change in taxes could also lower their wage expectations for next year.

Wage growth will remain relatively high due to the shortage of suitable labor. The higher economic activity is lifting employment in 2017. In 2018, employment is expected to remain at around this year's high level, as the labor supply will be limited despite the growing demand for labor, Swedbank said.