OREANDA-NEWS. January 24, 2011. Following considerable improvements in the markets of many countries in recent months, Nordea, the largest bank in the Nordic and Baltic countries, has adjusted its economic forecast for 2011. Developed economies will grow more rapidly than expected, while growth of the Baltic economies will be fairly modest, reported the press-centre of Nordea.

‘The global economic situation at the end of 2010 was significantly better than expected. The new year is likely to bring many surprises as economic forecasts may have to be adjusted given the debt problems of European countries and the increasing prices of resources. 2011 will be a transitional year for the global economy, and economic growth will not be as rapid as in 2010’, Zygimantas Mauricas, Nordea Economist, said.

Eurozone: a two-speed economy
With the global trade volumes growing, the economies of Germany and other major industrial European countries grew rapidly, while peripheral countries such as Greece, Portugal and Spain are still fighting the economic recession as well as public finance consolidation challenges.

The growth of the German economy was determined by the rapidly expanding export volumes of industrial products to other eurozone countries and to Asia. German industrial companies managed to maintain most of their jobs thanks to active involvement in the Kurzarbeit short-term employment programme, which helped the country to increase industrial product volumes following the resumption in economic growth.

Examples from individual countries show that the economies of individual countries will recover at different speeds: countries with well-developed industries and export practices will continue to enjoy economic growth, while the growth rate of peripheral countries will be hampered by stagnant recovery of domestic consumption and still fairly high unemployment rates.

2011 will not be an easy year for the European Central Bank either. The Bank will have to take important decisions in the field of monetary policy since increasing interest rates too early may worsen the prospects for economic growth in the peripheral countries and increase tensions in the finance sector. On the other hand, if lower interest rates are maintained for too long, there is a threat that new real estate and financial asset bubbles will develop.

Baltic States: first signs of economic recovery
Economic growth is broadening in the Baltic States, but economies will not grow as quick as before the crisis.

‘The highway of economic growth encouraged by internal consumption has now ended and we will have to drive on a much slower road, which is grounded on industrial production growth’, Mr Mauricas said. In his opinion, the scenario for growth of the Lithuanian economy will be more reminiscent of the L-shaped rather than U-shaped recovery.

‘Taking into consideration the current situation, it seems likely that our economy will return to the pre-crisis level in 5 or 6 years’, he said.

According to Mr Mauricas, it is particularly important to note that, compared to the other two Baltic States, the fall of the Lithuanian economy was the least severe and that the country’s economic recession was the shortest. The Estonian economy started to fall in early 2008 followed by Latvia around mid-2008 while Lithuania was hit by economic recession only in late 2008. During the nine quarters of economic recession, the Estonian economy shrank by 18.8 percent, the Latvian economy shrank by 23 percent while the Lithuanian economy from peak to trough shrank by only 15.6 percent. This was determined by the relatively smaller boom in the construction sector and by a better diversified industrial structure in Lithuania.

Baltic economies are expected to follow similar economic recovery path with moderate economic growth expected for the three countries in 2011:

The Estonian economy will receive a positive boost with the introduction of the euro, which is likely to encourage national consumption thanks to increased consumer confidence, and to attract more foreign investors. A stronger economic basis for Estonia is also ensured by the stable finances of the public sector, although the country’s economy is facing other challenges such as rising inflation and high long-term unemployment.

In Latvia, close attention will be paid this year to fiscal consolidation, since following completion of the IMF financing project Latvia will have to be ready to manage its public finance policy independently and to start borrowing on international financial markets. This year, the country’s economy is likely to be boosted by national consumption and increasing material investments.

Lithuanian industry has grown for the third quarter in a row, while exports remain the main driving force of economic growth, although its impact in the near future will decrease due to the limited industrial growth potential (i.e. lack of qualified labour and scarce investments). Certain concern also exists regarding the prospects of growth of national consumption, which will be hindered in 2011 by the high unemployment rate, emigration, and the still common fairly negative expectations of the population.

‘In order to maintain growth, we will have to adjust our economic growth model and encourage the development of sectors open to foreign trade. Historical experience shows that, at the end of an economic recession, industry becomes the main driving force for economic growth, while the development of sectors focused on the internal market (internal trade, construction, and services) is considerably slower’, Mr Mauricas said.

Inflation
With very little increase in personal income, no significant increase in the prices of services or industrial goods is expected in the near future. However, a major threat of a rise in inflation is posed by the continuing increase in the prices of food, fuel, and other resource in international markets.

Labour market: between the hammer and the anvil
The labour market in Lithuania will undergo recovery at different speeds, and the gap between those with low incomes and those with high incomes will continue to widen. The large supply of labour with specific qualifications (e.g. in sectors such as construction, transport, wood processing, and textiles) is unlikely to encourage salary growth in the relevant sectors; therefore, a considerable number of workers will find themselves between the ‘hammer’ of an increasing inflation rate and the ‘anvil’ of stable low salaries.

Budget cuts: won’t the scissors become dull?
It is a good sign that the improving economic situation and the financial consolidation in the public sector have reduced the risks in Lithuania. However, to ensure a balanced budget in the long term, Lithuania will need to make a much greater effort than Estonia. Achieving a budget deficit which is lower than 3-percent of GDP will not be an easy task. The growth in national debt will also depend to a great extent on whether the Government is able to resist certain temptations associated with the political cycle and demonstrate sufficient will not to slacken the reins and to continue budget consolidation.