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Wednesday 21.03.2018 | Name days: Una, Unigunde, Dzelme, Benedikts

Swedbank: Russia’s current economic growth model is outdated

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUEconomic growth in the Baltic Region is rather weak. The reason for this is the weakness of Eurozone’s economy, geopolitical risks related to Russia and the imbalance of the countries’ economies, as concluded by Swedbank in the latest Baltic Sea region report.

Latvia’s economic growth has become slower. It is expected to remain slower than it was in the past. Investments are necessary in order to balance economy. Latvia has had luck with the attraction of foreign investments. However, their inflow in to the country has declined in the past three years. Investments of Latvian companies in other countries gradually begin to grow. This trend is expected to continue. In order to contribute to a more rapid economic growth, companies have to invest in the improvement of efficiency, research and development, as well as climb out of shadow economy, notes Swedbank senior economist Lija Strašuna.

According to her, global economic growth is unequal. Because of this, economic growth of large countries has been lower than previously anticipated lately. Eurozone is especially weak. This slows down global economic growth as well. Although slowly, the global economy continues to grow. This is vital for Baltic States, because their economic growth is based on exports. This region’s economic growth remains below its expected growth rates. This applies to long-term and short-term growth. Economic growth of the region is slowed by the weakness of Eurozone and geopolitical tension caused by the Russian-Ukrainian conflict. Slow economic growth is also partially the result of structural inequality of the region’s economies.

Swedbank predicts that the region’s economic growth will be 1.2% in 2014. It is expected to become even weaker next year – only 0.9%, which is even slower than what it predicted for Eurozone. This is largely because of Russia and the expected recession there. Even though other economies of this region will likely grow, this growth will be very moderate. Economic growth in the region is expected to be around 1.9% in 2016. This is largely because of a more rapid economic growth in Eurozone and hopes that the Russian-Ukrainian conflict will stabilize.

Strašuna emphasized that the region’s overall competitiveness and economic growth can be improved through stronger integration and specialization. In order for this to happen, it is important to secure structural quality of economies, their improvement and reduction of differences with other countries of the region. Swedbank’s compiled Baltic Sea Index shows that the region is among 24% of the most competitive countries in the world in terms of structural quality. This year’s BSI has reached 7.6 (7.4 last year), and is better than the average EU index (7.1) but worse than the one in USA (8.4).

In addition to economic weakness and geopolitical risks there are also a number of internal factors that will slow down Latvia’s economic growth in a short-term and long-term perspective. For example, the number of employed persons will decline in a long-term perspective due to current demographic trends.

BSI predicts a slight increase for Latvia in the area of the economy’s structural/institutional quality up to 6.9 (6.1 last year). This means Latvia is among 31% of the most competitive countries of the world. Latvia has managed to get ahead of Lithuania (6.6). However, Latvia remains below the average index in the region (7.6) and Estonia’s (7.7) index. Considering that current reform plans are rather plain and lack ambition, Latvia may lose its positions in the next couple of years if its competitors prove more successful in the implementation of reforms.

The largest improvements accomplished in the past two years have been noticed in infrastructure and logistics. Progress has been noted in other areas as well, but it has been slower. The innovation climate is an exception – it has become worse.

In order to strengthen competitiveness and secure economic growth, businessmen have to invest in efficiency and development of innovative products. Successful realization of this is only possible if the company is not engaged in shadow economy. It is absolutely necessary for entrepreneurs to climb out of shadow economy. This will help them reach a new level of productivity and export power. Officials should help them accomplish this by reducing tax burden, supporting innovations, investing in research and by continuing the realization of improvements to the country’s business environment, advised Strašuna.


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