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International Internet Magazine. Baltic States news & analytics Tuesday, 22.09.2020, 04:26

Luminor: Lithuania's 2020 GDP will grow by 0.2%, Latvia’s and Estonia’s will reduce

BC, Vilnius/Riga/Tallinn, 15.09.2020.Print version
Luminor improved on Tuesday its Lithuanian economic forecast for 2020 to 0.2% growth, from the 2.5% contraction projected in March. The bank expects the economy to expand by 4.4% next year and by another 4.2% in 2022, reporta LETA/BNS.

Unlike in the 2009 crisis, Lithuania will emerge from the current crisis as one of the least affected countries and will significantly reduce the gap with Western Europe, Luminor's economist Zygimantas Mauricas said. 

The forecasts were improved based on the latest retail, industrial and bank card payment data, he said, adding that the government's economic stimulus measures had had an effect, too.  "The most realistic scenario seems to be that we'll avoid a recession this year," Mauricas told a news conference.  

Lithuania successfully handled the healthcare and liquidity crises, the first two stages of the COVID-19 crisis, allowing a faster reopening of the economy, according to the economist. "The number of cases in Lithuania has never exceeded the EU average, which allowed us not to get too scared and to open the economy faster than other EU countries," Mauricas said.

"We are likely to cope with the third stage, the bankruptcy and unemployment crisis, quite well, too," he added.

Luminor forecasts that Lithuania's average annual unemployment rate will reach 8.6% this year before easing to 7.8% in 2021 and 7.2% in 2022.

Average wages are projected to grow by 6.5% in 2020, by 6% in 2021, and by 8% in 2022. 

Consumer prices are forecast to rise by 1.4%, 2.6% and 3%, respectively. 

The general government balance is likely to remain negative this year at minus 5% of GDP, before narrowing to minus 2% in 2021 and to minus 0.5% in 2022.  

Latvia's gross domestic product (GDP) could decrease by 4.8% this year, but next year the economy could grow by 4.4%, with growth accelerating in 2022, Luminor bank economist Peteris Strautins said in a presentation of Luminor Bank's latest Baltic Economic Review on Tuesday.

"Latvia has overcome the crisis much better than was forecast in the spring. Despite the decline in private consumption and the decline in exports of services, the relatively good industrial indicators related to the rapid recovery of exports helped to alleviate the crisis," said Strautins.

The economist explained that the food industry, pharmaceuticals and electronics sectors were already expected to perform well in exports, but the wood processing industry, which was not expected to do so, also performed well. The chemical industry has also performed well.

"There could be no illusion about what will happen to the tourism industry. The performance of goods export sectors has been one of the best in the European Union, but the road to recovery in tourism and aviation will be long," said Strautins.

According to Strautins, the export of services also has a good chance to recover quickly, as more than 50% of the sector's exports are exports of high value-added services, which have suffered less in the crisis.

The economist expressed the opinion that the future forecasts for Latvia's exports are favorable, as Latvia's export product portfolio has proved to be suitable for the new conditions and the crisis has accelerated the restructuring of the economy. The expected improvement of the quality of local government in Riga, as well as the growing competence of local governments in other regions will be very important for the development of export sectors.

"The GDP curve is also like a saw tooth - the decline in the second quarter was so sharp that, even in the variegated history of Latvia's economy, turned out to be the quarter with the largest decline compared to the previous period. Currently, in the third quarter, the fastest ever GDP growth could be recorded,'' said Strautins. "It is very difficult to predict how consumers will behave, but there is a possibility that the consumption boom could be very strong after the end of the pandemic, as the country has largely protected households from deteriorating financial conditions and people will try to catch up in 2020 by actively traveling and attending events,'' Strautins predicted.

He mentioned that a sharp rise in inflation is also expected next year, which will be facilitated by both the lessening of factors reducing inflation and large investments, as well as the fact that households will spend the money accumulated during the pandemic. If in 2020 the average inflation will be a few tenths of a%, then next year the average inflation will exceed 2% and in the following years it will continue to increase, overheating the labor market.

 The Estonian economy has started to recover quickly from the impact of the coronavirus due to strong consumption, and the country's economy is expected to grow 4.2% next year, Luminor says in its fresh forecast published on Tuesday.

According to Luminor, the impact of the coronavirus on the open economy of Estonia was not as strong as was feared. Estonia surprised positively in the second quarter of this year with an economic downturn that was two times lower than the average in the euro area.

Luminor's chief economist Tonu Palm pointed out that the downturn of the Estonian economy in the second quarter was more moderate than expected, amounting to just 6.9% year on year. At the same time, the average rate of contraction of the economy in the euro area was 15%.

Palm said the quick recovery of the Estonian economy has been driven by extremely strong retail sales. An unprecedented boom occurred at the height of the crisis in Estonian e-commerce, where sales volumes increased by more than 40% on average in March and April compared to the previous year.

"When we take a broader look at retail trade, we see that the volumes exceeded the level of last year in Estonia already in May," the chief economist said. "This is an outstanding achievement and shows that the consumer is more stable and stronger than before. Whilst retail sales dropped by a record 18% in Estonia and only by 2.7% in the euro area after the global financial crisis in 2009, the situation has now reversed. Retail sales increased by 2% in Estonia and dropped 3.4% y-o-y on average for the first seven months of this year. This reflects stability," he said.

The strong support measures for the economy, the easing of the COVID-19 restrictions and the newly emerging external demand mean that the recovery of the economy with the export and industry bouncing back as well will become more broad-based in the future. The Estonian economy will decline by 4.6% this year, but grow by 4.2% in 2021 already.

Depending on the developments related to the coronavirus and the rate of improvement in demand for the export of goods, the return to growth could be even stronger, Palm said, adding that the speed of economic recovery will be fast in the first stage, but will remain uneven across economic sectors for the time being.

Palm said that the growth prospect of European countries on the back of the easing of coronavirus restrictions and the exceptionally stimulating monetary and fiscal policy is already improving rapidly.

"Keeping the spread of the virus under control remains the main key to success, and Estonia and its main trade partners have managed to do it well so far,” Palm said. "However, the number of new coronavirus cases is growing again in Estonia and Europe, which is a serious risk. Curbing the spread of the virus is the foundation of economic certainty and a precondition to the recovery of investment volumes," he added.

The chief economist of Luminor pointed out that the distancing requirements established to restrict the spread of the coronavirus boosted the digitalization of the economy and the technological transformation, the impact of which on business models and the labor market will last for years.

"The best example of this is the boom in e-commerce, where sales volumes increased by more than 40% on average in March and April when compared to the previous year," Palm said. "The data communication volumes of the digital economy are also growing very fast, which will lead to a new global race in the context of the development of 5G mobile communication and services," he said.

More important for Estonia than the initial growth boost will be the future economic policy choices, that is, where the billions of euros borrowed by the state and the money of the EU structural funds, which are meant for supporting the recovery from the coronavirus, will be invested.

"Time will show us the priorities of the economic policy, but for the first time, Estonia has the opportunity to steer smart development by making large investments in smart economy," Palm said. "Rapid economic growth lies ahead of us, but it could also be bolstered by invests into export potential."

He added that the selection of investments determines largely the speed of the sustainable and long-term income growth, the benefits Estonia will reap from new technologies and how green the growth will be in the next decade.

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