RIGA - The Swedish SEB group of banks is one of the most active banks in the Baltic states, and on Oct. 12 they released their latest monthly report "East European Outlook" which reports on the economies of the region. The bank, along with everyone else, is warning the Baltic states about their skyrocketing inflation. A special report on labor in the Baltic states was also a focus of the report.
Of the three Baltic states Lithuania was the only economy that the bank did not issue a cool down order to. However, inflationary risk due to increasing labor shortages is a common problem for all three Baltic countries.
"Lithuania's GDP is showing stable growth. The economy is balanced, with inflation and the current account deficit at moderate levels. The real estate boom has faded. Growing labor recruitment problems pose an inflationary risk," the report said.
Estonia was predicted to grow faster this year than any other country in Eastern Europe, with SEB predicting a growth rate of 11.5 percent. However, the report noted that demand will remain strong, and warned that, "growth will be hampered by a worsening shortage of resources with rapid pay hikes and asset market bubbles increasing the risk of a hard landing."
Latvia is close to overheating, according to the report. The consumption and credit boom is predicted to persist with the trade deficit also seen to remain high. Merchandise imports exceed exports in Latvia by a whopping 80 percent. Unemployment is at a record low level and will continue to drive very high wage and salary increases.
The shortage of labor, exacerbated by continued emigration, is adding additional fire to the current skyrocketing inflation rates of the Baltic states by creating a situation of ever increasing salaries. The report had a special focus on the labor situation facing the Baltic states.
"In the immediate future, the issue of labor supply will be even more acute than inflation and is likely to halt Latvia's march towards the average EU income level. The shortage of qualified labor will hamper the plans of businessmen and government institutions, and the situation will become more and more complex," the report said about Latvia noting that, "the outflow of the workforce is likely to continue for a few more years, triggering broad public discourse on immigration policy and the need to boost labor productivity." The same could also be said for Estonia and Lithuania.
The obvious solution to address a labor shortage is to import workers, however that is politically delicate in countries that saw 50 years of labor migration from the east during the Soviet period which created a Russification of their societies.
"Some entrepreneurs are demanding easier access to qualified labor, but the government and large segments of society do not support this," the report noted.
Estonia recently approved the free movement of labor for Romanians and Bulgarians as soon as they enter the EU in 2007, and parliamentarians in Latvia have called for a similar measure.
One way out is for the Baltic states to use the legitimate goal of joining the Euro zone to politically allow Baltic governments to use policy instruments they have at their disposal to try to get inflation under control.