Analytics, Baltic, Economics

Estonian gross domestic product will fall 0.9% this year before resuming growth of 0.4% in 2009, the rating company said in a report titled called ''The Baltic Hangover''.

Latvia's growth will probably slow to 0.7% this year, with negative rates in the third and fourth quarters, and expansion may average one% in 2009, the report said.

Accelerating inflation and falling property prices curbed consumption-driven growth and raised the risk of recession in the Baltic countries that enjoyed the European Union's fastest growth in 2006. Credit-fueled growth started to falter in the fourth quarter of 2007 in Estonia and Latvia, cutting investment and curbing domestic demand.

''The outlook on all three Baltic sovereigns remains negative due to the continued risk of a hard landing for the Baltic economies,'' Eileen Zhang, a credit analyst at S&P, said in the statement.

Lithuania's 2008 growth may slow to 4% from 8.8% last year, S&P said. S&P revised its estimate from a previous forecast of 3.7% in January, citing continued increases in government spending.

Estonia's annual growth rate slowed to 0.1% in the first quarter compared with 7.1% for all of last year, whilst Latvia's economy grew 3.3% in the first three months of 2008, compared with a 10.3% rate in all of 2007.

S&P also raised its inflation forecast for all three Baltic states, citing global food and oil prices followed by rapid wage growth. Consumer price growth, which is three times faster than in the euro area, is stalling economic growth.

Estonia's inflation will probably accelerate to 13% in 2008, before slowing to 8.3% next year, the report said. Latvia's inflation may average 17% this year and 12.3% in 2009.

The rating service changed its inflation forecast for Lithuania this year to 12.5% from the previous estimate of 10% in May. Inflation will slow to 7% next year, it said.