Economic growth rate continues to speed up and become more balanced in all three Baltic States. Thanks to more rapid cyclic growth in Eurozone than expected and limited influence of political uncertainty on the global economy, Nordea Bank’s economists predict 3% growth in Lithuania and Latvia, and 2.5% growth in Estonia.
Economic growth is becoming more balanced. Private consumption, which has been the main engine behind economic growth in the past three years, has slowed down because growing inflation will impact income growth for households. Exports and investments will increase thanks to better external conditions and higher investor trust, experts comment.
They predict that fiscal policy will serve as support to growth, because Baltic States have some of the lowest state debt and budget deficit levels. The main focus will be put on stimulation of economic growth, bot budget balancing. Higher inflow of EU funds will help increase the government’s expenses and investments.
Because inflation pressure in the world is becoming higher and higher and local job markets tend to overheat, the risk of Baltic States experiencing price rise caused by increased wages is high, experts say.
Nordea Bank’s economists predict that it would be a temporary stimulus for economic growth, but it may negatively affect international competition in the long run. «If productivity does not increase along with inflation and wages, Baltic States will likely become expensive before becoming prosperous.»
Nordea chief economist in Baltic States Zigimants Mauricas says prices of consumer goods and services in the Baltic Region are already higher than what is found in Poland, Czech Republic, Hungary and Slovakia.
«Baltic States have very little in the way of competing with aforementioned countries in terms of low costs, because massive savings here are limited, the distance from here to Western Europe is longer and certain business sectors lack competition. It is worth mentioning in this context that Poland for Baltic States is like Germany for Nordic States: prices in Nordic States are 20-40% higher than the prices in Germany. In Baltic States, however, prices are 20-40% higher than prices in Poland. This is why if Baltic States hope to compete with Visegrád Group, they have to develop industries that create added value and no longer bet on their low-cost countries status,» Mauricas comments.
The economic expert says that ICT technologies and software programme industry is rapidly growing in all three Baltic States. This offers some hope, but the general feeling is controversial because investments in research and development are limited and reliance on low technological level exports remains high.
Government’s reforms will improve economic growth in Latvia
Nordea Bank’s economist in Latvia Gints Belevics explains that Latvia has managed to balance its state finances in spite of difficult economic growth indexes. He notes that lower oil prices and improving service export indexes have helped prevent current account deficit in 2016. «This has allowed Latvia to become a deficit-free economy. Nevertheless, this situation will not last, because the government puts more focus on stimulating economic growth.»
«Finance Ministry has proposed a comprehensive tax system reform. Its goal is to reduce tax burden for small wage recipients and improve competitiveness of businessmen. This could serve as support for more rapid economic growth in the next 3 to 5 years. Nordea Bank predicts 3% growth for Latvia’s GDP in 2017 and 2.8% in 2018,» Belevics explains the economic situation.