Raise a glass to 'outright recession'

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

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

"The Baltic States are in a tailspin. The economies of both Estonia and Latvia contracted in Q1, shattering any hopes of a soft-landing from a recent period of overheated growth. As a result, we have slashed our forecast for this year and next. The upshot is that we now expect an outright recession," Capital says, citing a slump in construction activity and the "spectacular" popping of the real estate bubble as the two main contributing 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 remains fairly positive, it singles out the countries of the Baltics and Balkans as being worst-placed as financing conditions deteriorate thanks to their "consumption binge" of the last few years.

And if that's not bad enough, dwindling consumer confidence and the lack of room for manoeuvre of the Baltic central banks will only worsen the situation, Capital believes.

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

"Because all three countries operate currency boards, they cannot rely on a fall in the exchange rate to restore competitiveness and boost net exports. Instead, the adjustment must come via domestic prices. But with inflation set to soar to 20% in Latvia this will be a long process.

"The upshot is that we now expect a recession in Estonia and Latvia this year, followed by a protracted period of sub-trend growth. Because the imbalances are less severe in Lithuania it should experience a milder slowdown, but growth will still slow sharply."

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

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

Nordea agrees with Capital Economics that the boom-bust cycle is more pronounced in Latvia and Estonia, whereas in the Lithuanian economy the upswing and the coming downswing will be more moderate. Even though the short-term outlook for the Baltic countries is bleak, growth will resume after a few slow years - and the Baltic countries will continue to offer "new business opportunities," Nordea believes.

Nordea acknowledges that companies exporting to the Baltics will likely find it harder to sell their wares than hitherto, but balances that with opportunities to take advantage of a much more competitive labour market.

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