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Tuesday 16.01.2018 | Name days: Lida, Lidija

Russian-Ukrainian conflict expected to reduce economic growth in the Baltics

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUThe recent developments in the world and Russia in particular demonstrate that there is no time to relax, even during good economic growth periods. Everyone should be prepared for unpleasant turns of events. The Russian-Ukrainian conflict will reduce Latvia’s economic growth this year and next year. Economic growth will remain positive nonetheless, as it is mentioned in Swedbank’s latest economic outlook.

Short-term negative impact will be concentrated in specific companies and economic sectors. There will be events that will likely impact Latvia’s weakest sectors in a long-term perspective. This is especially true for energy security, says Swedbank’s chief economist Martins Kazaks and senior economist Lija Strasuna.

It seems that economic growth in Eurozone has stabilized and, after last year’s 0.3% drop, economic growth will likely rise by 1.3% this year and 1.9% next year. However, latest developments in Russia have forces economists to review economic outlooks. In its basic scenario, Swedbank assumes that the Russian-Ukrainian conflict will no escalate further in the near future. The situation is expected to gradually stabilize and sanctions from western states are limited and moderate in their scale. There may be a brief reaction from Russia in the form of short-term trade barriers.

According to the bank’s experts, under this scenario Russia’s economy will likely drown in recession this year and will grow by only 0.8% this year and next year. Russian ruble’s value will continue to reduce, although the process will not be as rapid as it was in the beginning of the year. Russia’s economy is structurally and institutionally too weak to generate enough power for rapid growth and income rise. On top of that, the outflow of money and higher interest rates due to the Russian-Ukrainian conflict will only reduce investments and cripple growth potential. Household consumption, which has been Russia’s main economic growth engines until now, continues to gradually lose its power. Unemployment has reached its lowest point. Employment does not seem to grow and income growth is becoming more stable. Export growth is further reduced by the rising global trend for oil prices to slowly drop. Nevertheless, Russia’s overall level of reserves is high. This reduces risk of deep economic crisis ever coming to the country. It will allow the country to ‘sit one out’.

Economists also reviewed Estonia’s economic outlook. It was reduced to 1.8% this year and 3% next year (January’s outlook was 3% and 3.7% respectively). Among the three Baltic States, Estonia’s economy is expected to grow the slowest this year. This is because the economic tension between Russia and Finland and the labour market. Lithuania’s economic growth is expected to be 3.3% this year and 4% next year.

Economists have also reduced Latvia’s economic outlook for the next couple of years. This is mainly due to external factors and Latvia’s weaker than expected growth at the end of 2013, especially in the field of investments. It is expected that Latvia’s GDP will grow 3% this year and 3.5% next year.

According to Swedbank economists, weaker external demand will reduce export growth. Nevertheless, it is expected that the drop of exports to Russia will be compensated by growth of exports to other countries. The negative impact on the country’s economy is rather concentrated. Specific industries and companies may suffer more than others (food processing and alcohol production). This may apply to the transport sector as well (transit sector in particular).

Higher degree of uncertainty may force businessmen to postpone their investments (especially those who export goods to Russia and CIS countries), as well as delay the inflow of foreign investments.

Considering the rather conservative way the 2014 budget was compiled in Latvia, it may cause a slower pace of economic growth. Tax revenue continues to grow and this year’s first quarter had nearly met its plan.

The trend of having the state spend more money is becoming more and more apparent – this includes pension indexation for those employed in the public sector and the necessity of complying with NATO requirements. According to economists, economic growth will be slower than expected. With that, tax revenue will grow slower than expected. A reduction of labour taxes and no increase of other taxes, according to Finance Ministry, will help reduce the current tax burden from 27% of GDP to 25% in 2016. ‘What it means is that the pie, which has to be divided among state and municipal budgets, will become even smaller. It is a discussion politicians have been trying to avoid, but ignoring the problem will not make it go away. The size of the tax burden and its division is one of the most important matters to discuss in the planning of the next year’s budget, which is due to begin soon,’ – the economists conclude.


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  1. Commentator says:

    The Estonian flag is upside down…

    Thumb up 0 Thumb down 0

  2. Linda says:

    well spotted. An African state has the same colours but not sure which one and in what order.

    Thumb up 0 Thumb down 0

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