Swebank: Baltic Outlook: the economy freezing up

The global economy is heading towards a recession. However, it is not yet clear how deep it will be and how long it will last, as it is not clear whether the coordinated action of global economic powers will have a lasting effect on markets or not. In addition, we do not know what the consequences of the recent troubles are. Hence it is quite difficult to formulate a forecast now for every country. It might easily happen that current expectations prove to be too optimistic, and that global economic developments may turn out to be worse than currently expected, write the authors of the Baltic Outlook.

Revisions have been made of forecast for the Baltic economies, taking into account the changes in the global economy and in the Baltic countries themselves (data revisions, policy changes etc). The Baltic economies were heading towards recession without the recent troubles in the global financial market, and the worsened economic situation and outlook in the financial world have made our forecast significantly gloomier, as all three countries are subject to global economic developments. It would be very difficult to show improving growth rates in the Baltic economies at a time where the global economy and particularly their main trading partners are in a recession; however, whether recovery will come at the same time as in partner countries and how strong it will be depends on the local economies.

The authors of the Baltic Outlook have cut growth expectations for the Baltic countries and expect negative GDP growth in Estonia and Latvia in 2008 (the countries have already entered formal recession as they had two consecutive quarters of negative quarterly growth), while Lithuania will still note positive annual growth figures in 2009 (though well below previous expectations). The year 2009 is expected to be the most difficult for all three countries: the experts forecast a fall of around 2 % in Estonia, 4 % in Latvia and only minor growth in Lithuania. 2010 should bring slow recovery in Estonia and Latvia, with 2 % and 1 % growth respectively, but the Lithuanian economy is about to suffer from the closure of the Ignalina nuclear power station and followed that sharp increase in electricity prices.

The economic situation in Latvia
Latvia has started official talks with the European Commission and the IMF about funding to stabilise the economy, according to the Latvian Prime Minister Ivars Godmanis.

“The main reason for the need of help from the EU and the IMF is the recession and financial crisis aggravating public finances”, says Cecilia Hermansson, Chief Economist at Swedbank. The loss in revenues due to the weaker demand, as well as the increased spending due to the takeover of Parex Bank, the second largest bank in the country, may cause the budget deficit to increase.

Latvia’s economy shrank 4.2 % in the third quarter, according to preliminary figures. The large current account gap is decreasing as a result of weaker domestic demand, and stood at about 12 % of GDP in the third quarter.

“We expect that Latvia’s economy will continue to shrink during next year, and possibly also in 2010, — says Dainis Stikuts, Senior Economist at Swedbank in Riga, and co-writer of the Baltic Outlook. — At the same time internal and external imbalances will gradually improve. In the meantime, the economy needs support to maintain stability.”

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