RIGA - The threat of the Baltic economies overheating remains a real one, although a 'soft landing' is still the most likely outcome, the economic research unit of Scandinavian banking group SEB says in its latest analysis.
Growth will slow modestly in the Baltic countries, but overheating risks remain, SEB believes. Although credit growth has eased slightly, inflation and current account deficits remain at high levels, the survey said.
The rapid increase in private sector credit has begun to slow down in all three countries. In Estonia and Latvia, this is connected with early signs of a weakening property market.
As for inflationary pressure, however, the situation has worsened. SEB has raised its inflation forecasts for all three countries. Although there will be some easing of inflation next year, none of the countries will end up with an annual average below 4 percent, it said.
Pay increases of 20-30 percent this year are fuelling price pressure, and though such increases are expected to slow next year, they will still be at high levels. In Estonia, planned increases in value-added tax are also likely to prevent inflation from falling faster in 2008.
SEB anticipates that growth of the Baltic economies will slow down modestly. In Estonia, growth will drop from 8 percent this year to 6.5 percent in 2009; in Latvia from 10 to 8 percent; and in Lithuania from 8 to 6 percent. The three economies will thus move down towards their potential level of 6-7 percent, SEB believes.
But since they have grown at a high speed for many years, they have already had time to build up imbalances. Over the past couple of years, Latvia and Estonia have shown clear signs of overheating. To date, Lithuania has not exhibited equally obvious imbalances, SEB said.
Since the central banks of the three countries with their fixed exchange rate systems have limited potential to cool the economies, SEB emphasizes the role of commercial banks in controlling credit expansion.
SEB estimates world economic growth to drop from 5.4 percent in 2006 to 4.7 percent in 2009.