Analytics

Lithuania faces the biggest overheating risks, but Latvia and Estonia are not far behind.

The bank said that the Baltic economies are seeing a steep growth for several years already, while the demand created by the economic activity has been exhausting laborforce reserves. Shortage of laborforce promotes a steep growth of the average wage.

"Even though the economy has not overheated yet, the temperature is rising with each year of the steep growth. The economic policy makers should keep cool minds and implement cautious policies to prevent economic fever and possible complications," said Swedbank.

The bank reminded that the 2008-2009 crisis hit the Baltics more painfully than other countries, and now, looking back, the trouble seemed obvious – wage rise by 20.3%, housing prices and loans driven by ungrounded optimism rose twice as fast as wages.

"The consequences were severe. The economy dropped by 15-20%, wages dropped, unemployment level jumped by 20%, many people emigrated," the bank noted.

At present, the unemployment level is at its lowest point in the past ten years. Shortage of laborforce promotes a steep rise of the average wage, arising discussions and concerns about possible overheating.

Swedbank has developed an economic heating index that is measuring the economy temperature in the Baltic states, comparing the development trends since 2015 in the following indicators – lending, unemployment, inflation, the current account balance, wage and productivity, housing prices and wage.

"Even though the sentiment of businesses and households is high, lending in Latvia and Estonia is growing slower than economy, in Lithuania it is growing as fast as economy, and there is no real estate bubble. The current account balance is around zero in the Baltic states, there is no alarm in this area. The biggest overheating risks are in the laborforce market. Still, even though the unemployment level is nearing its historically lowest point, wage growth is just slightly higher than productivity growth, and the impact of the growing laborforce costs in the inflation is moderate," said Swedbank’s chief economist Agnese Buceniece.

The Baltic states may avoid overheating or reduce its consequences by implementing cautious monetary and fiscal policy, said Swedbank.

"The Baltic policy makers should actively consider structural and quality changes in different economic sectors, thus, promoting potential economic growth and efficient distribution of resources. Defining priorities will be a part of the new government formation process in Latvia. While the economy is going through its good years, a reserve should be accumulated in the budget and measures should be taken to reduce the overheating risks," said Buceniece.