Capital concerned about Baltic imbalances

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

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

'We have downgraded our forecasts for GDP growth across theBaltic States,' the update says.  'At thesame time, we have upped our inflation forecasts on the back of rising energyprices. So while a hard landing remains unlikely, the adjustment to a moresustainable path of growth will feel painful compared with the boom enjoyedsince the turn of the decade.'

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

Moving into particulars, Shearing points to slowing privateconsumption, tighter credit controls and the impact of the global economicdownturn.

Even positive signs such as apparently accelerating GDPgrowth in Lithuania fails to impress and it is dismissed as 'largely astatistical illusion reflecting the restoration of full production at the ABMazeikiu Nafta oil refinery.'

As a result, Capital is increasing its inflation forecastsfor 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 asharper slowdown in activity than we had initially expected. But we still thinkthat a hard landing is unlikely. After all, in order for the economies to gointo recession there would probably need to be a disorderly devaluation of thecurrencies. We still see this as being unlikely,' the report concludes.

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