Deficits, demand dropping, depression

RIGA's Estonia and Latvia are exhibiting the most pronounced economic slowdowns inthe whole of Central and Eastern Europe, according to a new briefing fromCapital Economics.

Ananalysis of the region released on April 29 says that divergence in growthtrends is becoming more marked, with countries running large current accountdeficits "beginning to feel the pinch from a deterioration in global financing conditions."

Notwithstandingthe fact that Estonia's current account deficit is actually among Europe'ssmallest, the slowdown in the real economy has been most severe in Estonia andLatvia where domestic demand has slumped, Capital believes.

"Elsewhere,countries with smaller external deficits such as Poland and the Czech Republic,have escaped relatively unscathed, while overheating is now thepredominant concern in Russia," it continues.

Theoutlook for the Baltic economies has deteriorated sharply in recent monthsaccording to the report, which points to falling levels of constructionactivity and greatly reduced consumer confidence as key indicators.

"Confidencelevels have plunged and inflation has continued to accelerate sharply. Weexpect domestic demand to continue to slow over the course of this year," thereport says.

"Theoutlook for Estonia and Latvia has deteriorated sharply. A recent period of above-potentialgrowth has been driven by rampant domestic demand and a booming constructionindustry. But the latest indications from the EC business survey suggest thatsentiment has now collapsed."

"Inflationhas continued to rise throughout the region and is now running at 16.6% y/y inLatvia. This has partly been driven by rising food and energy prices, but corepressures are increasing as well. As runaway inflation continues to squeezereal incomes, private consumption looks set to slow further over the course ofthis year. While this may feel like a painful hard-landing to many in theregion, a slowdown in domestic demand remains essential to close the massivecurrent account deficits," the report concludes.