In spite of recent developments in the world and Eurozone, the global situation remains largely stable and beneficial for the development of the Baltic market. The current trend shows that 2016 and 2017 will become significant for Baltic States in terms of lending growth and attraction of new trade partners, all of which will bring positive developments for internal and export markets. Estimates show that Latvia may become a leader in terms of GDP growth among Baltic States in 2017.
As noted by DNB Markets economist Yekaterina Rojaka, the global situation is currently beneficial for Baltic States – growing oil prices help create a healthy inflation, the possibility of Brexit is relatively low and the Chinese economy continues to become more stable and developed, which reduces risks on financial markets and provides confidence to investors.
In total, the economy of Baltic States continues growing at a steady pace. Growth rates in all three Baltic States will likely exceed the average indexes across the EU this year. GDP growth in Latvia could reach 2.5% this year (2% in Estonia and 3% in Lithuania).
DNB has reviewed outlooks for Latvia. It was previously expected that GDP could grow more than 3% this year. According to DNB economic expert Peteris Strautins, the review of the outlook was mostly determined by the decline in transit; consumption growth also looks weaker than expected. Growth is also impeded by the gradually reducing influx of money flow from EU funds. Such conditions were previously expected. At the same time, one of the most beneficial factors to growth turned out in accordance with expectations – household lending continues to grow, but the main macroeconomic influence will follow soon. For example, the volume of new mortgage loans of DNB Bank had more than doubled in Q1 2016. The beginning of 2015 was an unusual period of time, especially considering the uncertainty with the principle of left keys. Nevertheless, the volume of new mortgage loans was three times larger in the first three months of 2016 in comparison with any other period starting from 2008.
GDP growth may be somewhat disappointing this year. However, it can be expected that everything in Latvia’s economy that was not strong to begin with will finally break by the end of 2016. The list of risks that pose a threat to future growth will become narrower and factors that contribute to welfare will become stronger.
Rojaka also mentions that the rules of the transport and logistics sector have changed – while in the past the industry handled entire wagons with cargoes, carried volumes have declined to kilograms now. Competition is very high in the industry, so it is important to be able to sell oneself. The expert is also positive about Rail Baltica project, which is expected to contribute to economic development of all Baltic States in a long-term perspective – new investments, new jobs, additional services, etc. At the same time, the expert expresses her disappointment that politicians seem incapable of reaching any kind of agreements regarding economic benefits on the scale of Baltic States alone. Unfortunately, this trend is already noticed in other industries.
Peteris Strautins mentions that even though there is some progress in macroeconomic indexes, this does not mean Latvia has entered stagnation. The economy in Latvia and other Baltic States is developing dynamically. However, in addition to that there is also the effect of limited demand and trade with other countries of the former USSR. This effect is weaker in other EU countries. This is why Baltic States were not as good last year as they did in previous years. By overcoming this short-term influence, Baltic States can become leaders in Europe once again. The most rapid growth is expected to take place in Latvia next year. GDP growth there is expected to be 3.5%.