When the domestic overheating calms down in the Baltics, the preconditions for exports to the countries diminish. However, prospects for outsourcing production improve as property prices and building costs fall and labour shortages ease. The opposite is the case for Russia and Poland. Export opportunities have never been better in light of the rapidly increasing growth of the purchasing power of these two countries’ large populations. ­­

- Until recently, the Baltic countries were the star performers in terms of growth among the European Union countries. However, the economic outlook deteriorated in all the countries in early 2008, and the adjustment towards slower growth has started. In Estonia and Latvia the slowdown seems to be much faster than we previously expected, says Anssi Rantala, who is Nordea’s expert on economic developments in the Baltic countries and Russia. Developments in all Baltic countries show a similar pattern, though the magnitude of the boom-bust cycle varies across the countries. The boom-bust cycle is more pronounced in Latvia and Estonia, whereas in the Lithuanian economy the upswing and the coming downswing will be more moderate. Even though the short-term outlook for the Baltic countries is bleak, growth will resume after a few slow years – and the Baltic countries will continue to offer business opportunities for the Nordic companies.

- The Russian economy has shown impressive growth figures during recent years. The favourable developments are expected to continue. Strong real wage growth boosts private consumption and lifts more people into the middle class, says Anssi Rantala. The rise of the middle class as consumers and producers of goods and services is a self-reinforcing process and a key to broad-based growth. The biggest worry in the Russian economy is the surging inflation, which directly affects consumers’ purchasing power.

- The Polish economy expanded more than 6% y/y for the eighth consecutive quarter in the first quarter this year. This was supported by the ongoing improvement in the labour market and continued massive capital inflows. For the full year of 2008 and probably also 2009, we expect growth to be above 5% despite higher interest rates, a stronger PLN, weaker foreign demand and higher food and energy prices. That is how resilient the economy seems at present, says Anders Svendsen, Nordea’s economist covering Poland. EMU membership may be possible from 2012, he adds.

Baltic Rim Outlook June 2008