Recovery of Baltic Rim economies on track

08-06-10 10:00 | Press release

The Baltic Rim economies - Estonia, Latvia, Lithuania, Poland and Russia - have been fairly isolated from the sovereign debt crisis in the European Monetary Union. The reason is that public finances are in much better shape in the Baltic Rim than in Southern Europe. Moreover, Estonia's bid to join EMU, even if decided before this latest crisis, shows that the convergence process is still alive.

In Estonia recovery hopes have been further strengthened by the increasing likelihood of euro adoption in 2011 after the Commission's recommendation. We consider the risk of a political "no" to be very small. The recovery is expected to be export-led, with one of the government's main challenges over the coming years being reducing unemployment and thus supporting consumption.

The Latvian economy is stabilising, and we see a gradual recovery over the coming quarters. The main support is expected to come from the export sector. Increasing the uncertainty in the economy is the political instability, which is likely to intensify ahead of the parliamentary elections in October. The fiscal consolidation measures for the 2011 budget are likely to be postponed to after the elections.

The Lithuanian economy is recovering gradually, with Q1 2010 the weakest quarter since 2005 (in LTL). The main GDP components, except private consumption and inventories, continued to decline. Nevertheless, consumption is still at weak levels, and we see households struggling amid declining wages and rising unemployment. Thus, we expect only lacklustre growth in the economy this year.

In Russia the first estimate for Q1 GDP was weaker than anticipated, indicating that the early recovery has been slower than expected. However, we expect growth to pick up later this year, with exports leading the recovery. In the long term the main risks to growth stem from the subdued activity in credit markets, capacity constraints in the energy sector and the old and inefficient structures of the economy.

The slowdown in the Polish economy in Q1 was temporary, and we believe the recovery is on track. We are seeing more signs of a stabilising labour market and expect the unemployment rate to peak this year. That could bring new growth drivers such as investment, credits and the housing market out of their global financial crisis hideout. However, it also means that we have fiscal and monetary tightening ahead.

For further information:
Global Chief Economist Helge J. Pedersen +45 3333 3126
Chief Analyst Anders Svendsen (Poland) +45 3333 3951
Analyst Annika Lindblad (the Baltics and Russia) +358 9 1655 9940