Analytics, Economics, EU – Baltic States, Export, GDP, Investments

The euro-area turbulences over the summer resulted in low business confidence and ultimately in a contraction of investment in the third quarter. Yet, GDP growth accelerated in the second half of the year thanks to a considerable expansion in net exports in Lithuania. Export of goods and services is estimated to have grown in real terms in 2012 by 10.2% and import by 6.0%. This buoyant development was supported by strong growth in the other Baltic States, a partial refocus of trade flows towards the CIS, and a record harvest boosting exports of agricultural products. As a result, the trade and current-account balances improved, writes LETA/ELTA.

Growth is set to continue, but its composition is expected to change. Recent high frequency indicators suggest an improvement in economic sentiment and sustained output growth. In particular, private investment is expected to pick

up, as credit is in principle available, interest rates are at a historical low, and companies have significant reserves to finance potential investment.

Inflation (HICP) decreased to 3.2% in 2012 reflecting weaker growth in food and energy prices. Core inflation remained at 2.4% as the slower price growth of processed food was offset by a higher one in services and industrial goods. These trends are expected to prevail.

Employment continued to grow across all sectors in 2012 and the unemployment rate is estimated to have decreased to 13% (from 15.3% in 2011). However, businesses have remained cautious and tended to hire more part-time workers. The unemployment rate is projected to decrease to 11.4% in 2013 and 9.8% in 2014. Real wage growth was positive in 2012 after three years of contraction. It is forecast to continue, supported by a 17.6% increase in minimum wage. This measure is targeted at replacing a significant part of informal wage payments, and should thus have only limited impact on the labour market.

In 2012, Lithuania's general government deficit is estimated to fall to 3.2% of GDP and is forecast to narrow further to 2.9% in 2013 and 2.4% in 2014 on the back of continued economic growth and a limited increase in expenditure. Total revenue and expenditure in 2012 were close to the budget plan.

SoDra is assumed to reduce its deficit as the labour market is set to improve. The structural deficit is estimated to decrease from 2.7% of GDP in 2012 to 2.2% in 2013 and 2014. General government debt is set to stabilise slightly around 40% in 2013 and 2014, shrinking from an estimated 41.1% of GDP in 2012.

According to the fresh winter forecast of the European Commission, the Estonian economy will grow by 3% in 2013; in the autumn 2012 forecast they expected Estonia to have 3.1% economic growth this year. Yet, the forecast is the fastest in the euro area.

The 2014 growth forecast is 4% and 2015 growth forecast 2.5%.

The European Commission expects inflation to slow down to 3.6% this year and 3.2% in 2014. The government sector is forecast to have a 0.4% deficit this year and 0.2% surplus in 2014.

The European Commission expects the economies of Estonia's main trading partners to recover in the second half of this year and exports should start motoring growth again.