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Hard Brexit is bad, US-China trade wars are nasty, but Germany matters most

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RU

The fallout from hard Brexit can be bad. US President Donald Trump, demanding cuts of interest rates, clashes with the Federal Reserve, calling its head «an enemy worse than China‘s Xi Jinping». And then comes Germany which economy is in the doldrums for nearly one year now. Against the unpromising backdrop, the Baltic states‘ economies, and especially that of Lithuania, are still doing pretty good and an abrupt halt is unlikely.

Banks are optimistic

SEB and Swedbank, Scandinavian banks, keep drawing a rosy picture for the region for the remainder of the year and during most of 2020, too.  Speaking of Lithuania, according to a new SEB Bank prognosis, its GDP is set to grow at a fastest rate among Baltic states this year. Notably, it will be Lithuania that will see GDP’s fastest pace in the upcoming two years, too, according to the report.

In the Nordic Outlook report released this week, the bank economists concluded that Lithuania’s GDP growth, at 4.2 percent, in the first half-year was much stronger than expected due to «surprisingly» strong net exports. In the light, Swedbank even raised Lithuania’s GDP for the rest of the year – from 3 per cent (April’s estimate) to 3.7 per cent. The Estonian GDP was tweaked by the bank from 3 per cent to 3.3 per cent, but Latvia saw a slash in its GDP, from 3.3 per cent to 2.8 per cent. Importantly, Swedbank says Lithuania’s growth in 2020 will stand at 2 per cent, meanwhile in Latvia and Estonia – 2 per cent and 2.3 per cent respectively.

So is there anything to worry about?

RE sector does not register any tremors yet

To see how well the economy is doing in Lithuania locally, one just needs to look around not only in megapolises where new buildings under construction are towering, but also in less urbanized towns, too, where new construction sites are popping up and those completed houses never wait for their buyers long.

«To tell you the truth, the summer has been insane, I mean in terms of sales of new apartments and houses. The supply is hardly catching up with the demand despite the record-high real estate prices. I am in the midst of making several deals where the numbers of purchases are all-time record-highs,» Regina Lingė, co-founder of Palanga NT (RE) brokerage firm, told BNN. «However, talks about a looming crisis is in the air,» she added.

For now, the picture seems spotless across all Lithuanian industries, as a matter of fact.

Germany sours Lithuanian businessmen’s mood

Speaking to BNN, Sigitas Besagirskas, a prominent Lithuanian economist and president of Vilnius Industry and Business Association, emphasised that the manufacturing in Vilnius county remains strong and the pace is not likely to slow down in short-term, Yet he cautions that industrialists are getting increasingly wary – and weary – about the bleak prospects of German economy.

«Alas, it is underperforming for the eighth consecutive month, which is a bad omen. All want now to see if it will rebound in the second half-year,» Besagirskas said. «I’d say it, not the fallout from hard Brexit or the US and China trade wars worries all most,» he added.

With 11.9 per cent of the volume, Germany is second, right after Poland, on Lithuania’s top exporter list and among top- five investors.

«Lithuanian economy is small, yet very much oriented to Germany, so it is very likely that the German slowdown will make a negative impact on the export market,» Besagirskas emphasised.

Lithuania’s Germany-bound export has risen an impressive 30 per cent over the last year and, of the volume, ca 70 per cent accounted for logistics.

«A slower German economy can also negatively affect all foreign direct investments in Lithuania,» he added.

Yet the expert does not send Mayday calls so far. «An incessant inflow of EU funds is still available for Lithuania companies, although the co-financing has become bigger. So the inertia from the couple last years of growth coupled with the availability of the funds will keep economy rolling forward,» Besagirskas concluded.

Other economists do not foresee troubles either

Tadas Povilauskas, economist of SEB Bank Lithuania, says that the economy expansion in the second half of the year and in 2020 will be «significantly» slower due to the deteriorating foreign trade balance. Yet SEB Lithuania upgraded its GDP prognosis for Lithuania from 3.2 per cent to 3.6 per cent due to the faster than planned growth of economy in the first half-year. Notably, SEB did not adjust the GDP growth for Lithuania for 2020, which is at 2.4 per cent now.

Swedbank Lithuania’s chief economist Nerijus Mačiulis also points out that most of Lithuania’s structural indicators do not cause much anxiety about its economic prospects.

«Even though we forecast that the global economic growth in 2020 will be the slowest since 2009 and will be below 3 per cent and that more than one big industrial country will probably find itself in recession, we continue to project Lithuania’s growth at 2 per cent. It will be almost half as slow as this year,» Mačiulis said this week.

He notes that Lithuania’s economy remains balanced and shows no signs of overheating, so external shocks are much easier to absorb.

Long-term outlook looks gloomier

The Lithuanian Confederation of Industrialists (LCI) does not send alarms of distress too, but acknowledges that long-term outlook for the country looks gloomier than a year ago.

According to Gabrielius Makuška, an LCI expert, albeit Lithuanian producers’ overall expectations are still marked with optimism, but there are more signs in the expectations of an approaching slowdown.

«Lithuanian companies are acknowledging it with more concern. For example, the recent Central Bank‘s survey shows that the share of companies forecasting export growth has decreased from 26 per cent to 20 per cent over the last half-year. Such gloomier expectations are particularly spread among small and medium-size companies. There are also fewer businesses that expect growth of demand. The number of the latter dropped from 31 per cent to 25 per cent, also over the last six month,» Makuška underscored to BNN.

Challenges to Lithuanian economy

World economies’ global watchdog, International Monetary Funds, concluded in late June that Lithuania’s economy is stable and the country is better than ever prepared for challenges. Borja Gracia, the head of the IMF mission in Lithuania, said then that Lithuania’s economic state is viewed positively, but accentuated that Lithuania needs to improve the education system for it to meet demographic changes.

Lithuania’s Central Bank has named two substantial risks for financial sector: financial imbalances in the Nordic states that Lithuania’s banks are interconnected with and stronger activity in Lithuania’s credit and real estate (RE) market, which can potentially create the risks of a «bursting bubble» in the run.


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