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Tuesday 22.08.2017 | Name days: Rudīte, Everts

Swedbank: risks for Baltic States are tied to developments in Russia

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUThe forecast for Latvia’s economic growth in 2015-2016 remains unchanged. The country’s GDP, on the other hand, is expected to grow 1.9% in 2015, which is mostly because of consumption by Latvian households, wage rise and weak inflation, as concluded in Swedbank’s latest economic forecast.

Exports and investments are negatively influenced by geopolitical uncertainty, decline of Russia’s economy and slow development of administrative processes of EU funds. Thanks to support from the monetary policy, global (including Eurozone) growth will gradually become stronger. With that, Latvia’s exports and investments will become stronger and economic growth will reach 3.5%, as noted by the bank’s economists.

It is noted that Eurozone’s time has come to increase economic growth – the European Central Bank has launched a massive programme for the procurement of bonds. It is expected that economic activity will recover, and growth is expected to be the strongest mainly for Spain and Germany. Trends have not been all that positive in the last six months. For example, economic growth in USA had been growing slower in 2014 and beginning of 2015. Short-term factors were mostly to blame for this.

The different in employed monetary policies of two of the largest central banks in the world – US Federal Reserve and ECB – will create additional tension and risks. With euro weakened, Eurozone’s competitiveness has been improved at the expense of other countries. Talks about ‘currency wars’ will likely become louder. Fluctuations on financial markets will also affect economies of developed countries, creating serious capital outflow risks. Many countries will overcome this obstacle rather successfully (like India and China), others will suffer from more negative outcomes (like Russia and Brazil). Swedbank’s base scenario provides for a gradual speed-up of economic recovery in the next two years. The largest risk to the global economy (in terms of influence) is the imbalance in China, where economic growth is on a rise and debt level is high. Chinese authorities are expected to handle it. There are also positive risks. For example, Eurozone’s recovery along with a more active support from the employed monetary policy may turn out stronger than expected.

The largest risks of Baltic States remain largely related to political and economic developments in Russia. Its economy continues suffering from chronic problems – the old development model no longer works because prices on energy resources have declined significantly. Weak and unpredictable business environment does not allow other sectors to develop. Although the price of oil and Russia’s currency have recovered slightly, Russia continues sliding into recession, experts say.

It is expected that GDP growth rates will remain approximately on last year’s level, with the lowest point being in the middle of the year. It is expected to become more rapid in 2016.

Export dynamics fluctuate. While exports of goods had grown 5% in January, it had also declined by 3% shortly after in February. As previously predicted, exports to Russia from Latvia have reduced sharply (by 29% in the past two months). This decline, however, is largely compensated by an increase of exports to other markets. Export dynamics have been very heterogeneous among sectors. For example, wood processing industry and machinery production continue to grow, but food production and textiles sectors continue to decline. Development in sub-sectors and enterprises continues to fluctuate, months of growth intermix with months of decline. This situation will continue. However, exports are expected to grow in 2015.

Consumer price growth outlook for 2015-2016 has been reviewed and corrected from 0.8% to 2.7%. Labour market development outlook remains largely unchanged – new jobs do not come up often, but wage rise is expected to grow nonetheless.

Household consumption outlook remains unchanged as well – it will remain the main economic growth engine in Latvia in 2015. Retail trade had increased to reach 6% in January and February (without fuel), which is twice as fast as last year’s rate. Right now it is hard to foresee if this is a permanent change in consumers’ behaviour or a short-term change caused by cheaper fuel prices, as noted by Swedbank’s experts.


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