Deficits, demand dropping, depression
RIGA – Estonia and Latvia are exhibiting the most pronounced economic slowdowns in the whole of Central and Eastern Europe, according to a new briefing from Capital Economics.
An analysis of the region released on April 29 says that divergence in growth trends is becoming more marked, with countries running large current account deficits “beginning to feel the pinch from a deterioration in global financing conditions.”
Notwithstanding the fact that Estonia’s current account deficit is actually among Europe’s smallest, the slowdown in the real economy has been most severe in Estonia and Latvia where domestic demand has slumped, Capital believes.
“Elsewhere, countries with smaller external deficits such as Poland and the Czech Republic, have escaped relatively unscathed, while overheating is now the predominant concern in Russia,” it continues.
The outlook for the Baltic economies has deteriorated sharply in recent months according to the report, which points to falling levels of construction activity and greatly reduced consumer confidence as key indicators.
“Confidence levels have plunged and inflation has continued to accelerate sharply. We expect domestic demand to continue to slow over the course of this year,” the report says.
“The outlook for Estonia and Latvia has deteriorated sharply. A recent period of above-potential growth has been driven by rampant domestic demand and a booming construction industry. But the latest indications from the EC business survey suggest that sentiment has now collapsed.”
“Inflation has continued to rise throughout the region and is now running at 16.6% y/y in Latvia. This has partly been driven by rising food and energy prices, but core pressures are increasing as well. As runaway inflation continues to squeeze real incomes, private consumption looks set to slow further over the course of this year. While this may feel like a painful hard-landing to many in the region, a slowdown in domestic demand remains essential to close the massive current account deficits,” the report concludes.
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