The Baltic Times Magazine spoke with representatives from the local central banks to gain insights into the economic performance of Estonia, Latvia, and Lithuania in 2024 and their outlook for 2025.
Martins Kazaks, Governor of the Central Bank of Latvia:
In 2024, Latvia's economy has performed better than Estonia's but has fallen short compared to Lithuania's. This mixed performance is due to several factors. Global economic conditions, particularly in key export markets, have been sluggish, weakening external demand and impacting manufacturing and trade. Domestically, consumer spending has slowed as people focus on saving, further dampening economic growth. Long-term competitiveness issues, such as delays in EU-funded projects and the Rail Baltica initiative, have also hindered the expansion of Latvia's export sectors.
Despite these challenges, this period of slower growth reflects a healthy adjustment, with businesses and households building stronger financial foundations. Latvia's economy continues to show potential for long-term gains, particularly through structural improvements supported by European Union funding. Its strategic location and adaptability give Latvia an edge in achieving sustained growth. By addressing competitiveness challenges and optimizing its resources, Latvia is well-positioned to match or surpass its regional peers in the near future.
As a banker, certain concerns stand out. Latvia's declining competitiveness and weak external demand could further slow export growth and recovery. Additionally, rapid wage growth, driven by minimum wage increases and labor shortages, risks outpacing productivity growth, potentially leading to inflationary pressures and reduced competitiveness. However, there are also reasons for optimism. A low inflation environment, supported by declining global commodity prices, has been a stabilizing factor. Consumer sentiment, while cautious, is gradually improving, and increased spending could stimulate economic activity. Moreover, the possibility of structural reforms in education and infrastructure offers a pathway to enhanced competitiveness and long-term growth.
Looking ahead, Latvia must take decisive action to accelerate its economic development. The effective use of European Union structural funds is critical for enhancing productivity and driving growth. Reducing excessive bureaucracy, particularly in areas like construction and insulation regulations, is essential to create a more dynamic economic environment. Another crucial issue is Latvia's shrinking workforce. Over the past five years, employment levels have declined, in contrast to Lithuania and Estonia, which have increased their workforces through higher domestic labor participation and successful integration of Ukrainian and Belarusian refugees. Latvia must focus on both attracting labor and better utilizing its existing human resources.
Latvia faces no shortage of ideas but struggles with slow decision-making and inaction. To progress, the nation must embrace risk and take responsibility. Progress often involves making mistakes, but these should be seen as opportunities to learn rather than assign blame. Ambitious goals are also essential—without bold targets, Latvia risks falling into ineffective patterns. Strategic resource allocation, streamlined processes, and a willingness to innovate and adapt are key to unlocking Latvia’s full potential. With decisive action, Latvia can position itself as a leader in the Baltic region, achieving sustained economic growth and long-term success.
Rasmus Kattai, Head of Economic Policy and Forecasting Division at the Bank of Estonia:
2024 was a year of stabilization for Estonia’s economy, which had been stumbling in previous years. While production volumes did not decline further, no significant growth was observed either. However, beneath this overall stagnation, considerable dynamism was evident at the sectoral level. Some industries, such as IT, continued to perform well, while others, like manufacturing and construction, struggled to find their footing. That said, there are bright spots even in these troubled sectors, as some subsectors have begun to see an upturn.
Estonia’s weaker performance compared to its Baltic neighbors has been attributed to an unfavorable composition of export markets, stronger appreciation of the effective exchange rate, and higher private sector indebtedness. These factors, coupled with high interest rates, have taken a heavier toll on Estonia than on Lithuania or Latvia. However, these disparities are beginning to erode, offering hope that the economies of the three Baltic states will become more synchronized in the years to come.
This economic downturn has been unlike previous crises. Notably, unemployment rose only slightly, while incomes saw a significant increase. For the financial sector, this meant that despite the sharp rise in interest rates, individuals and businesses have generally managed their loan payments well, as evidenced by the low number of overdue loans. Companies have similarly navigated the recession with relative ease, maintaining their ability to service debts.
Interest rates have already started to decline as monetary policy normalizes, with further reductions expected based on market trends. For Estonia, this marks a turning point. As much of the borrowing in Estonia is tied to variable rates that adjust every six months, lower interest rates are expected to quickly benefit households and businesses. This rapid transmission of favorable financing conditions is a significant advantage for Estonia compared to other eurozone countries, where rate changes take longer to impact borrowers.
Given the ongoing uncertainty fueled by geopolitical tensions and shifts in global economic models, Estonia’s government needs to focus on long-term planning and stability. While recent crises required reactive "firefighting" measures, it is now crucial to prioritize predictability and fiscal discipline. A clear and consistent vision will build trust among citizens and attract foreign investors.
The government should maintain fiscal responsibility while pursuing initiatives that strengthen the country’s industrial policy and stimulate growth. Long-term growth requires a strategic, forward-thinking approach rather than short-term fixes. Predictable policies and a strong vision for the future will provide the stability necessary for sustainable development.
I believe the year 2025 will be a turning point for Estonia, marking a slow but steady recovery. This forecast is supported by several positive developments already underway: energy prices have dropped significantly, inflation has returned to manageable levels, supply chain disruptions have eased, and new export markets have been established. These factors, along with moderating interest rates, provide a solid foundation for growth.
However, the recovery will be gradual, and Estonia’s economic prospects remain intertwined with those of its neighbors. Domestically, the government’s renewed focus on fiscal discipline in 2025 will likely weigh on short-term economic growth and reduce household spending power. While these measures may cause some discomfort, they are necessary for long-term stability, akin to taking bitter medicine for better health.
Jokubas Markevicius, Director of the Economics Department at the Central Bank of Lithuania:
Lithuania's economy began recovering in 2024, achieving a growth rate of 2.2%, making it one of the top-performing economies in the Eurozone. This recovery has been broad-based, driven by high-value exports in IT services and advanced manufacturing. Despite a challenging economic environment in the Eurozone, Lithuania's manufacturing sector has remained resilient, increasing output and shifting toward value-added activities. High levels of immigration have also contributed significantly to GDP growth.
Unemployment has stayed low and stable, while easing labor market tightness has slightly slowed wage growth, which is projected to end the year at just under 10%. Inflation has dropped to approximately 1%, boosting household income and driving increased consumption.
Lower interest rates in 2024 have also fueled demand for housing loans, leading to a recovery in the housing market, with property prices growing at a moderate rate of around 5% annually. Business lending has increased, although firms’ credit-to-GDP ratios remain relatively low. Lithuania’s financial stability remains strong, marked by low non-performing loan rates and a profitable banking sector. Notably, the windfall profit tax on banks has had no adverse impact on financial stability or lending, while contributing significantly to the state budget and easing fiscal pressures.
The Bank of Lithuania’s role in drafting a law to simplify housing loan refinancing, which will take effect on February 1st, was also important. This reform will allow mortgage holders to switch banks without additional costs, promoting competition in a market where loan margins remain among the highest in Europe.
However, Russia’s ongoing aggression poses the most immediate threat, with hybrid attacks, including state-sponsored cyberattacks on critical infrastructure, targeting the Baltic states. Strengthening Lithuania’s defense capabilities will require sustainable fiscal planning.
Looking ahead, Lithuania faces long-term structural challenges. The aging population will increase pension and healthcare costs by an estimated 4.6% of GDP by 2070, while the working-age population continues to decline, creating labor market pressures. Migration alone cannot offset declining birth rates, necessitating a carefully crafted migration policy to meet economic needs and integrate newcomers effectively. Additionally, the education system must address the shortage of qualified professionals, exacerbated by emigration and participation in the informal sector.
Public sector revenues remain insufficient, with an annual gap of 2.5–3 billion euros affecting critical areas such as education, healthcare, and infrastructure. Addressing this revenue shortfall is essential for long-term, sustainable growth.
To ensure sustainable growth, two primary policy directions are necessary.
Boost Productivity Growth: This includes increasing investment in R&D and improving the quality of education to enhance competitiveness.
Increase Tax Revenue: Measures could include reviewing tax exemptions, harmonizing taxation for self-employed individuals and employees, and raising taxes in underperforming areas like property and environmental taxes. Alternatively, a comprehensive review of public spending could identify efficiencies and redirect funds to more impactful areas.
Predictable, long-term strategies are essential to building trust among citizens and foreign investors while fostering economic stability.
As for why Lithuania outperformed Latvia and Estonia in 2024, I identify four key factors:
Non-Price Competitiveness: Lithuanian exporters have gained market share through high-quality goods and services.
Workforce Growth: A significant population increase, particularly in the IT sector, has boosted the labor market and economic output.
Government Investment: Substantial public investments have positively impacted construction, industry, and other sectors.
Rising Wage Fund: Increased wages have supported households, improved public finances, and created opportunities for greater social benefits and essential expenditures.
Looking to 2025, Lithuania’s economy is forecast to grow further, driven by higher external demand, increased EU funding, and better financing conditions. These factors are expected to stimulate investment, increase household incomes, and boost consumption. However, demographic challenges and slower growth in key trade markets may limit long-term potential.
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