Analytics, Baltic, Economics

Estonia's gross domestic product may shrink 1.9% in 2008, rather than an earlier estimate of 1% and Latvia's economy may contract 1%, instead of 0.5%, Hansabank Markets, a unit of the Stockholm-based Swedbank, said in an e-mailed note today. It also lowered its forecast for growth in Lithuania, the biggest of the three Baltic economies.

Estonia and Latvia lead the slowdown in the European Union as the global financial crisis curbs exports following a slump in consumption and the collapse of their property markets. The countries face their worst recession since regaining independence in 1991, with authorities reluctant to cut public spending.

"The Baltic economies were heading toward recession without the recent troubles in the global financial market, and the worsened economic situation and outlook in the financial world have made our forecast significantly gloomier, as all three countries are subject to global economic developments," said Maris Lauri, Senior Macro Analyst with Hansabank Markets in Tallinn, in the report.

Swedbank expects Estonia's economy to contract 2.3% next year, while Latvia's will shrink 4% in 2009. Lithuanian growth will be 4.5% this year, compared with an earlier forecast of 6%, and grow 0.5% in 2009.

According to the new outlook, the year 2010 will bring a slow growth in Estonia and Latvia (by 2% and 1%, respectively), but the developments in Lithuania will deteriorate due to closing of the Ignalina nuclear power plant and the consequent surge in the price of electricity.

The economic growth is mostly affected by weak domestic demand, it is to be expeted that unemployment will increase and pay growth will slow down abruptly. Despite the weakness of external demand, Hansabank Markets expects the developments in exports to be relatively good as entrepreneurs can exploit their competitive advantages, at least partially.

It is considered quite likely that Estonia’s and Latvia’s current account deficit and capital account deficit will fall below 5% of GDP by the end of the year 2009.

In Estonia it is to be expected that year-on-year price growth will be a single digit number in the fourth quarter of 2008 already.

The slower inflation rate has again made it possible to talk about adoption of the Euro. Hansabank Markets estimates that Estonia and Latvia might fulfil the Maastricht inflation rate criterion in the year 2010 already, but the risks that due to the declining budget revenue and the unwillingness of the governments to cut costs sufficiently the budget deficits in these countries might exceed the other Maastricht criterion limit – 3% of GDP.

“However, we hope that governments will behave responsibly and will limit spending that is less important; whereas it is very important to increase efficiency of public services; Governments should also avoid increasing financial burdens such as taxes etc on households and enterprises,” stated the Baltic overview.