The Baltics: Slowdown, but continued good resilience

We are sticking to our forecast of continued gradual recovery in the Baltics, despite indications of somewhat slower growth in Q4 2012 and in early 2013. In Latvia and Lithuania, this slowdown is mainly tied to weak capital spending, while in Estonia exports are sputtering. During Q3 overall growth otherwise rose: Estonias GDP grew by 3.5 per cent year-on-year, up from 2.2 per cent in Q2. Lithuanian growth soared from 2.1 to 4.4 per cent. In Latvia, which has shown more stable performance in the past year, growth climbed marginally to 5.2 per cent in Q3 the fastest in the EU. A robust increase in private consumption will help sustain GDP growth in all three countries, fuelled by gradual labour market improvements, low interest rates and in Estonia and Latvia also positive real wage growth. Meanwhile exports are holding up decently despite scanty Western demand, although short term slowdown in Russia and Poland, in combination with less than expected support from EU structural funds in 2014, has led us to trim our Lithuanian GDP forecasts somewhat compared to Nordic Outlook in November 2012. Exports are competitive after earlier internal devaluations, with inroads being made in new nearby markets as Western Europe has stagnated. But Estonias export growth is relatively sluggish, largely due to this autumns economic deceleration in the key Swedish and Finnish markets.
Key data Percentage change

THURSDAY JANUARY 10, 2013 Mikael Johansson Economic Research +46 8 763 80 93

2011 2012 2013 2014 GDP, Estonia GDP, Latvia GDP, Lithuania Inflation, Estonia Inflation, Latvia Inflation, Lithuania
Source: SEB

8.4 5.5 5.9 5.1 4.2 4.1

3.1 5.3 3.5 3.9 2.2 3.2

3.3 3.8 3.2 4.3 2.1 3.5

4.0 4.5 3.5 4.4 3.0 3.5

Economic Insights

DIVERGENT SENTIMENT SURVEYS LATVIA POISED TO JOIN EURO ZONE, EURO ISSUE STILL ALIVE IN LITHUANIA In recent months, data from the European Commissions sentiment surveys have provided mixed signals: weaker momentum in industry in Estonia but fairly stable trends in Latvia and Lithuania, and a continued positive trend in household confidence except in Estonia where optimism has dwindled lately. The Baltic countries are generally more stable than Western Europe, even though Estonia has wobbled in the past few months. Above all, the composite household and business sentiment indicators in the Baltics are well above those in the euro zone: 105 in Latvia, 102 in Estonia, 101 in Lithuania compared to 87 in the euro zone. The historical averages are 100. Labour markets have continued to improve. According to Eurostats standardised statistics, in both September and October the Baltics showed the EUs largest year-on-year unemployment downturn. According to national data, in Q3 Estonia fell below 10 per cent: 9.7. But Lithuania and Latvia still reported double-digit jobless rates: 12.3 and 13.5 per cent, respectively. Because of lingering uncertainty about capital spending and export trends and the fact that their service sectors have already begun hiring, we predict sluggish downturns in unemployment this year. Latvia has now publicly announced (FM Vilks, December 18) that in February the country will apply for euro zone accession in 2014. We have long predicted that Latvia will also get the green light after the European Union and the European Central Bank have completed their evaluation, probably in May; 1. The Maastricht criteria are within reach: The budget deficit is around 1 per cent of GDP and inflation is low and stable, standing at roughly unchanged 1.5 per cent in the final three months of 2012. 2. Convergence aimed at future euro zone membership was one of the key objectives of the 2008-2011 EU/IMF-led international bail-out package. 3. The EU and ECB want to show that the euro process is alive despite the economic crisis. Lithuanias new leftist-led coalition government, formed in mid-December after the October 2012 election, will loosen somewhat the austerity policies pursued by the previous centre-right government. PM Butkevicius, leader of the Social Democrats, has listed such economic goals as a higher minimum wage from January 1, 2013, a review of the tax system with an eye to cutting income taxes and raising taxes on capital and introduction of targeted tax relief for investments in weak regions. This declaration was not unexpected. More surprising was that the new government would also like Lithuania to adopt the euro as soon as possible, targeting 2015. The previous government targeted 2014. We had thought that given the election outcome, the euro issue would be relegated to an even lower priority. Our forecast has since a year ago been that 2015 is the earliest date for Lithuania to adopt the euro, since the country is in worse shape than Latvia in terms of meeting EU inflation and budget criteria.