PWC analyst Hardo Pajula observes that a large part of the growth is due to exceptionally good global demand conditions which have boosted exports into the euro-zone, thus making up for weak consumer spending and long-delayed corporate restructuring.
The tax structures of all the three economies being primarily built on domestic spending, the relatively weak domestic demand is creating fiscal strains throughout the whole region, PWC observes. The situation is particularly tense in Lithuania.
The analyst meanwhile warns that though the development of an export-led growth into a home-spun boom may ease fiscal pressure, it is almost certain to raise balance of payments concerns. The current account deficits of both Latvia and Lithuania are close to double-digit levels, and the speed with which Estonia's current account is responding to the cyclical upswing is also disquieting.
Hence, the Baltic governments will have to tread a perilous tightrope between external and internal equilibria, PWC states.
The task is particularly tricky for Latvia and Lithuania, whose currencies are pegged to the International Monetary Fund's SDR and the dollar and have thus experienced substantial real appreciation against the euro, making both countries vulnerable to adverse external shocks. The euro's strong recovery would of course reverse the situation and put pressure on Estonia.