IN 2005-2006, GDP growth in Estonia and Latvia peaked at 11 and 12.5 percent. According to recent SEB forecasts, GDP in Estonia will drop by 2 percent this year and growth in Latvia will only reach a modest 0.3 percent. However, in Lithuania the situation does not look as gloomy and
2008 growth will be around 5.5 percent. This will gradually drop to 4 percent next year and 3 percent in 2010.
THE COOLING DOWN of overheated economies will contribute to the softening of high inflation (in Latvia over 16 percent) as well as heavy import that has created a large deficit in the balance of current accounts.
- In order to stabilize high foreign debt, deficit has to come down to 6-7 percent of GDP. We estimate that Estonia will reach that level in 2009. It looks worse for Latvia and Lithuania, says Mikael Johansson, at SEB Financial analysis.
In the second quarter of the current year, Estonian and Latvian deficit was 11 and 15 percent of GDP. This was half of the peak levels in early 2007. The deficit in Lithuania’s balance of current accounts has been above 10 percent for a long time. However, a small stabilisation is in sight.
THE BALTIC GOVERNMENTS are facing difficult choices. On one hand there are austerity demands to soften financial imbalance, ie deficit in the balance of current accounts and high inflation. On the other hand, austerity packages will send domestic demand further down and deepen the economic downturn. The common denominator in Latvian and Estonian economic policies is to decrease deficits in the balance of current accounts, stop salary growth in the public sector (20 and 30 percent in Estonia and Latvia) as well as cutting down expenses.
- Estonia’s fall budget will most likely include reduced investment plans, increased VAT, a wage freeze and public sector reductions, says Mikael Johansson.
In Lithuania, economic policies are unclear facing parliamentary elections in the fall.
HOW LONG WILL it take for the Baltic countries to recover? It depends largely on economic policies as well as job market adaptability. According to recent SEB forecasts, the recovery will not be noticeable until 2010.
- Imbalances are softening, but the road to stability will be bumpy, says Mikael Johansson.
Emelie Ring