Capital concerned about Baltic imbalances

LONDON 's Economic forecasting firm Capital Economics has downgraded its forecasts for GDP growth in the Baltic states.

An update issued by Neil Shearing, Capital's emerging Europe economist, cites 'recent weak data' as cause for concern.

'We have downgraded our forecasts for GDP growth across the Baltic States,' the update says.  'At the same time, we have upped our inflation forecasts on the back of rising energy prices. So while a hard landing remains unlikely, the adjustment to a more sustainable path of growth will feel painful compared with the boom enjoyed since the turn of the decade.'

'Almost all of the news coming from the region in recent months has been bad.'

Moving into particulars, Shearing points to slowing private consumption, tighter credit controls and the impact of the global economic downturn.

Even positive signs such as apparently accelerating GDP growth in Lithuania fails to impress and it is dismissed as 'largely a statistical illusion reflecting the restoration of full production at the AB Mazeikiu Nafta oil refinery.'

As a result, Capital is increasing its inflation forecasts for 2008 to 10.3% in Estonia, 15.3% in Latvia and 9.5% in Lithuania.

'The upshot is that the region is set to experience a sharper slowdown in activity than we had initially expected. But we still think that a hard landing is unlikely. After all, in order for the economies to go into recession there would probably need to be a disorderly devaluation of the currencies. We still see this as being unlikely,' the report concludes.

Capital expects the Estonian economy to expand by 4% in 2008 with GDP growth in Latvia and Lithuania around 5% and 6% respectively.