OREANDA-NEWS. July 23, 2008. According to the new Baltic Outlook published by Hansabank Markets (HBM) on 18th of July, the prospects of economic growth continue to weaken in the three Baltic countries as global price increases put increasing pressure on local consumers. While the analysts’ have become more pessimistic regarding economic growth and inflation, the main story remains more or less the same, reported the press-centre of Hansa.

The growing price of oil (and other energy products) and food in global markets have become the major risks for future developments in the Baltic countries by pushing up domestic prices of necessities. Moreover, inflation has become a source of global concern increasing the risk of higher interest rates, including in the euro zone and that affects interest rates in the Baltic countries as well.

The deep and long-term recession in countries that are the main export destinations (e.g. Finland, Sweden, Germany, and the UK) is another risk, which would make the situation difficult for Baltic exporters.

For Estonian economy in upcoming years, HBM has drafted two possible scenarios, with quite equal probability: the optimistic and pessimistic scenario . The major differences between the two are bigger unemployment and stronger CPI growth at the end of 2008 and in early 2009 in the latter scenario.

We expect the Estonian economy to grow ~2.5% (~2% according to pessimistic scenario) in 2008, with close to 4% recovery in 2009 (slightly more than 2% in pessimistic scenario) and ~5% growth in 2010. HBM analysts expect domestic demand to fall this year, as household consumption and investments will fall.

According to the pessimistic scenario, household consumption will remain under pressure next year as well, but in 2010 we expect consumption to recover and strong growth of investments in both scenarios. The contribution of net exports will be positive in 2008 and 2009, and turn slightly negative in 2010 as growing domestic demand will cause imports growth to exceed that of exports.

According to HBM, Latvian economy is expected to grow ~1.3% both in 2008 and 2009, followed by ~4% in 2010. Household consumption will fall this and next year as unemployment and declining real incomes will weigh hard on households’ ability to increase spending. Investments are expected to fall as well, being pressed down by falling private investments (first of all residential construction) and gloomier growth prospects. However, public investments are expected to grow. The recovery of growth will be export-driven and will become evident in the 2nd half of 2009.

HBM has not changed growth forecast for Lithuanian economy yet, though risks are clearly downside now as investments and household consumption may weaken more than our current forecast assumes. Inflation, growing pessimism, lower credit growth and the global environment suggest that domestic demand will weaken as will exports growth.

So far relatively smaller misbalances (if compared with the worst times in Estonia and Latvia) and approaching elections in October 2008 with their rather loose fiscal policy are reasons to expect rather good growth rates in Lithuania. We expect the Lithuanian economy to grow ~6% this and 5.5% next year, 2010 will bring slightly stronger growth again . As domestic demand is expected to weaken imports growth will slow and bring a smaller current account deficit.

Weak domestic demand has already brought down import growth rates in Estonia and Latvia, and Lithuania is about to follow soon. With relatively good exports performance (which is expected to continue, though growth rates will be somewhat smaller) this means significantly better external balances.

Trade and service balances have already improved well in Estonia and Latvia, and we expect the current and capital account deficits to continue fall in following years. HBM analysts are most optimistic regarding Estonia, as the correction has been the swiftest so far: they expect the deficit to fall to 5.5-6% of GDP in 2009 and 2010 (15.8% in 2007). The Latvian current and capital account deficit will see the biggest correction, declining from 22.9% of GDP in 2007 to 7.5% in 2010. The improvement in Lithuania will be smaller, particularly this year, as the economy will continue to experience relatively strong growth (from 11.9% of GDP in 2007 to 8.6% in 2010).

Maris Lauri concludes: “Although we expect the slowdown to continue in all three Baltic countries and in this process negative growth rates in some quarters are possible, we also see that the period of 2008-10 will be years of strong change in the three economies.

The excessive price growth will slow to normal levels by 2010 allowing the countries to enter the euro zone in 2011-13 (we see this as being more problematic for Lithuania), current account deficits will fall as will foreign debt and companies will go through considerable and significant restructuring shifting away from businesses relying on cheap labour and energy. We expect productivity growth to improve over the next 2-3 years, as economically tighter years will force companies to pay more attention to efficiency and productivity.”