Baltic Rim Outlook: Risk of recession

The global financial crisis is increasingly influencing the economies in the Baltics, Russia and Poland. The impact on the different economies has been quite diverse, but in general the gloomier development will have a negative impact on the export opportunities for Nordic companies operating in these countries.

Nordea's report Baltic Rim Outlook forecasts a deteriorating economic outlook in the Baltic Rim countries due to the financial crisis. Estonia and Latvia have experienced the strongest upswing, and they are now facing a severe downturn, but growth is also slowing considerably in Lithuania, Poland and Russia.

• The pace of the slowdown in Estonia has been faster than expected, and the economy is projected to contract markedly through 2008 and 2009 and to show only modest growth in 2010. Labour market flexibility in terms of rapid wage adjustment and swift reallocation of labour from declining industries to expanding and more productive ones is the key adjustment mechanism of the economy. The political commitment to the currency peg is strong, and we expect the currency board to hold, says Senior Analyst Anssi Rantala, who is responsible for the Baltic countries and Russia.

He continues: - The outlook for growth has also continued to deteriorate in Latvia. Along with a weakening housing market, credit growth has slowed rapidly. The sharp contraction of consumption and investment will ease inflationary pressures, but only gradually. The lat is currently under pressure, but in our baseline scenario, we expect the currency peg to hold.

The Lithuanian economy still grew quite briskly in the first half of 2008, partly fuelled by sizeable personal income tax cuts implemented at the beginning of the year. However, the economy is heading towards a period of slower growth, and in 2009 the Lithuanian economy is projected to contract, as the domestic economy is weak and external demand subdued due to the global downturn, Anssi Rantala points out.

• While Poland has steered more or less clear of any direct impact of the financial crisis so far, it is certainly exposed to indirect effects such as tighter credit conditions, lower export market growth and a marked slowdown or even reversal of capital inflows. Consequently, we have revised down our GDP forecast for 2009, though we still expect a gradual upswing starting in the second half of next year, says Senior Analyst Anders Svendsen, Nordea's expert on Poland. Poland now targets EMU membership on 1 January 2012.
• The global financial crisis hit the Russian economy in the third quarter of 2008 on top of the sharp fall in oil prices since July and the military conflict with Georgia in August. Sizeable capital inflows in 2007 and in the first half of 2008 have turned into outflows during the autumn as investors have pulled money out of the Russian economy. The Russian authorities have reacted rapidly to the crisis with a rescue package worth more than 10 per cent of GDP. In spite of these supportive measures, we expect that growth will slow further in 2009, says Anssi Rantala.

Baltic Rim Outlook