Raise a glass to 'outright recession'

RIGA -- Everyone knows that a pessimist's 'half empty' beer glassis seen as 'half full' by an optimist. But where Baltic economy-watchers areconcerned, the future tastes either of recessionary vinegar or the delicatebouquet of a freshly-squeezed labour market.

Among the vinegar-swillers is London-based Capital Economics, whoselatest summary will leave a bitter taste in many mouths, while Scandinavianbank Nordea prefers a palatable blend of market corrections.

"The Baltic States are in a tailspin. Theeconomies of both Estonia and Latvia contracted in Q1, shattering any hopes ofa soft-landing from a recent period of overheated growth. As a result, we haveslashed our forecast for this year and next. The upshot is that we now expectan outright recession," Capital says, citing a slump in construction activityand the "spectacular" popping of the real estate bubble as the two maincontributing factors.

"This alone would be enough to knock 2%off GDP in Estonia," the summary states.

Though Capital's outlook for Central and Eastern Europe (CEE) as a whole remainsfairly positive, it singles out the countries of the Baltics and Balkans asbeing worst-placed as financing conditions deteriorate thanks to their"consumption binge" of the last few years.

And ifthat's not bad enough, dwindling consumer confidence and the lack of room formanoeuvre of the Baltic central banks will only worsen the situation, Capitalbelieves.

"We expect credit conditions to tighten further and the labour market togradually deteriorate. At the same time, rampant inflation will squeeze realincomes.

"Because all three countries operatecurrency boards, they cannot rely on a fall in the exchange rate to restorecompetitiveness and boost net exports. Instead, the adjustment must come viadomestic prices. But with inflation set to soar to 20% in Latvia this will be along process.

"The upshot is that we now expect arecession in Estonia and Latvia this year, followed by a protracted period ofsub-trend growth. Because the imbalances are less severe inLithuania it should experience a milder slowdown, but growth will still slowsharply."

However, washing the nasty taste of recession away isScandinavian bank Nordea, which has a significant branch network in the region.While it acknowledges that the current situation is less than rosé, it reckonsthere's no reason to fear a Baltic hangover in the latest edition of itsquarterly Baltic Rim report.

"In Estonia and Latvia the slowdown seems to be much fasterthan we previously expected," says Anssi Rantala, Nordea's main Baltic expert.

Nordea agrees with Capital Economics that the boom-bustcycle is more pronounced in Latvia and Estonia, whereas in the Lithuanianeconomy the upswing and the coming downswing will be more moderate. Even thoughthe short-term outlook for the Baltic countries is bleak, growth will resumeafter a few slow years - and the Baltic countries will continue to offer "newbusiness opportunities," Nordea believes.

Nordea acknowledges that companies exporting to theBaltics will likely find it harder to sell their wares than hitherto, butbalances that with opportunities to take advantage of a much more competitivelabour market.

Prospects for outsourcing production will improve as property prices andbuilding costs fall and the days of labour shortages come to an end. Having hadto hire virtually anyone who can be bothered to apply in recent years, overseascompanies outsourcing to the Baltics will finally be able to take their pick ofkeen applicants 's a situation many a personnel manager will be happy to toast.