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Monday 19.02.2018 | Name days: Zane, Zuzanna

Economies of Baltic States coming close to a new upswing phase

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The decline of Russia’s economic growth in 2014 turned out a serious challenge for Baltic States. Nevertheless, Latvia, Lithuania and Estonia have proven their flexibility by maintaining economic growth, which, according to DNB Bank experts, will likely speed up in Latvia and Estonia this year and all three Baltic States next year.

Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RULast year, Baltic States felt a significant impact from the Russian-Ukrainian conflict. The geopolitical situation forced the largest exporters to reduce their reliance on eastern markets by re-orienting foreign trade to western markets. This proved the flexibility of Baltic States. Export volumes from all three Baltic States have reduced significantly. Exports to Eurozone, on the other hand, have only increased, as noted in the latest DNB Bank outlook for economic events.

Economic growth is expected in this region this year and the next. On top of that, experts believe growth rates will likely speed up in the future. Only Lithuania is currently experiencing slow economic growth. Potential medium-period economic growth rate is similar across all three Baltic States – approximately 4%. It will likely remain for 2017 as well. Salaries will grow, but this year’s decline of import costs will keep inflation close to zero. Next year, however, inflation is expected to grow considerably.

«Baltic economies are varied internally. Their development is based on highly-skilled labour with expansive range of knowledge and skills. Each country has its own set of qualities. There is a lot in common as well. This includes rapid export development of commercial services during the period of overcoming the crisis. Estonia holds the largest accomplishments in this area. Latvia and Lithuania are close behind. Labour markets of Baltic States rapidly warm up. This process is reported to be the most rapid in Latvia. Wage level in all three Baltic States had grown by more than 5% last year,» – comments DNB Bank economic expert Peteris Strautins. Gross wages had grown the most in Latvia – 6.6% in Q4. Lithuania had seen the most rapid increase in the number of employed people – 1.8%.

Differences are noticed in crediting trends in the three countries. Crediting rates continued to rise in Estonia – the lowest credit portfolio there was reached in the first half of 2012. In Lithuania and Latvia, on the other hand, decline of portfolios will continue; it had even sped up in Latvia last year. There was an increase of 0.4% registered for the household portfolio in January. The total crediting portfolio volume for enterprises had reduced by 2.5%. Strautins believes there are signs that show crediting will likely become more active in Latvia as well. There are also positive signs of high demand for mortgage loans.

It is expected that Latvia’s economy will grow slightly more rapidly than last year. State economic growth outlook has been increased from 2.5% to 2.8% since the lowest point of impact from the crisis in Russia. Private consumption will remain the main source of growth this year. It is become clear that consumers’ caution was only a temporary one. It was caused by psychological factors. Contribution of exporters will gradually recover over the course of the year.

Lithuania’s economic growth will become slower this year – from 2.9% last year to 2.6% this year. As explained by Strautins, Lithuania’s specific problem is complications with transit to Kaliningrad. Its exports to Russia continue to decline rapidly – 40% by January. Short term benefits like currency exchange expenses and decline of interest rates, as well as larger foreign investments for Lithuania can be acquired with Eurozone membership. The launch of work of Klaipeda Liquefied Natural Gas Terminal can be considered a historic event. It will grant notable benefits from the perspective of energy supply independence. Infrastructure costs component for gas supplied through Klaipeda port can be reduced by attracting more customers in other countries and by using the terminal to its maximum power output – 3 billion m3 annually.

Estonia is also expected to experience a rise in business cycle phase. DNB Bank Lithuanian branch’s chief macroeconomic analyst Indre Genite-Pikciene explains that Estonia’s economic rise is largely dictated by accomplishments of the country’s export sector in overcoming different hardships. The period of complications for Estonia began sooner than it did for Latvia and Lithuania, especially considering the decline of Russia’s transit and influence from Finland’s electronic industry. Estonia’s economic growth had dropped to nearly zero at the beginning of 2014. It was about 2.1% and was mostly based on household consumption, which had increased by 4.6%. Investments had declined by 2.8% last year. «Investments into capital formation in Estonia remain the highest in percentage from GDP among EU member states – 25.8 percentage points (Latvia – 2.6 and Lithuania – 6.6). It is a strong argument in favour of more rapid economic growth for Estonia in the future. Nevertheless, it could slow down labour force availability in the long run. Unemployment in Estonia remains the lowest in Baltic States (6.6%),» – explains Genite-Pikciene.

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