Baltics: Economic performance further diverges

Erste Bank Research Team Erste Bank

The growth prospects of the Baltic region for this year deteriorated. Estonia is expected to contract this year again, following a 3% GDP decline in 2023. Latvia and Lithuania are recovering from mild recessions, driven by domestic private consumption and inflow of funds from the RRF. However, growth forecasts for 2024 have been revised downwards for all three countries. On a positive note, prices are returning to stability after high inflation rates in 2022 and 2023. In the next quarters, Baltic inflation rates are anticipated to converge to the 2% target.

Wage growth in Latvia and Lithuania remains robust, while Estonia has seen a deceleration in salary increases and rise of unemployment. Exports and industry are recovering mostly in Lithuania, with Estonia and Latvia projecting further downturns. The retail sector's performance varies, as Estonia still reports subdued performance and Lithuania significantly outperforms the EU. Consumer confidence is improving in Latvia and Lithuania, supported by better financial situation and anticipated economic environment.

S&P downgraded all three Baltic countries due to the impacts of the conflict in Ukraine, which forces them to increase defense expenditure and the security situation might discourage potential future FDI. As a result, public finances will remain under pressure and the growth potential and external competitiveness of these countries will deteriorate.

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Erste Bank Research Team

Erste Bank

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