DNB analysts: economic growth to slow in the Baltic countries in 2012

Vilnius. Economic growth of the three Baltic countries will be much slower next year compared to 2011 due to the uncertain situation in neighbouring markets, DNB analysts forecast in their outlook of the economic situation in the region.

The Baltic region has led the European Union (EU) in terms of economic growth this year. However, the inevitable downturn of the common market caused by pending cuts to public expenditure in many countries will have a strong effect on foreign trade in the three Baltic countries. Although both foreign trade and economic growth will slow, the growth  tempo will remain faster than in other EU countries.

The prolonged debt crisis in Europe and acute uncertainty about further developments are worsening the expectations of businesses and households and are having a negative effect on domestic consumption and investment plans as businesses tend to refrain from taking risks. Next year, these will be the main reasons behind the economic trends.

In the Baltic region, Estonia has a better long-term outlook, while slow-moving public sector reforms, lack of interest from foreign investors and strong emigration will be the primary obstacles for economic growth in Lithuania and Latvia.

Lithuania. If the EU entered into a new period of recession, it would have a depressing effect on economic development in Lithuania. The potential consequences could be mitigated by improvements in investments and competitiveness. However, that requires a consistent, energetic and targeted public policy. It looks the government has set the right targets and is trying to achieve them, but progress has been modest, as reflected by the results of both business surveys and international competitiveness studies. The public sector and business environment must be reformed to ensure stability and strong growth in the national economy, while the promotion of competitiveness should become a key priority for the government and for businesses. The DNB analysts forecast the country’s unemployment rate will end at 14% at the end of 2011 due to rising number of employed people and should ease  to 12% next year as emigration flows recede. The latest estimates also suggest that at the end of the year real wages will begin to grow as the inflationary pressure eases.

Latvia. More people are finding jobs in Latvia and wages have been rising more rapidly. Although the growth of real wages has been slow, domestic consumption has recovered on the back of falling unemployment. This is reflected by the growth of retail trade in Latvia, which has been one of the strongest in the European Union this year. However, long-term prospects for the national economy are bleak because of its severe sensitivity to demand changes in the EU region which is facing recession. The country must penetrate new markets and improve its competitiveness, which has been low so far.

Estonia. Encouraging indicators such as the recovering labour market, non-existent emigration and strong foreign trade point to fairly bright long-term prospects. However, excellent achievements cannot protect the national economy from negative external factors. The prospects for economic development in Estonia’s main foreign partners in the next two years have deteriorated and a leap similar to that seen this year should not be expected in 2012-2013. On the other hand, Estonia’s policy target to raise investment will help mitigate negative external impacts on the economy and growth will return to a sustainable level in 2013. Lending to households and businesses will remain sluggish next year due to the high debt level in the private sector.

Projections of key macroeconomic indicators