EC: Baltic recession to be worse than expected

  • 2009-01-21
  • Staff and wire reports
RIGA - The European Commission has predicted that the economic recession in the Baltic states will be significantly worse than previously expected.
In an economic overview of the EU released on Jan. 19, the commission said the Baltics would see larger than expected contractions as the global financial crisis takes its toll on the struggling economies.
The report marks the Baltic states' fall from the fastest growing economies in the EU just a few years ago to having the worst medium-term economic outlook in the bloc.
Th
e commission said that Latvia would likely see the largest contraction, with the GDP expected to shrink by 6.9 percent this year and 2.4 percent next year. The Latvian economy has already seen a 2.3 percent drop in 2008.
"The recession, which started in the first half of 2008 and originated in the reversal of the domestic real estate boom, turned worse during the second half of the year, when risk aversion became extreme on global financial markets," said the Commission report.

"The real economy, especially domestic demand, is facing a very severe downturn," it said.
Despite shrinking domestic demand and prospects for sharply lower wage growth, inflation is forecast to remain around 7 percent in 2009, as a result of VAT and excise tax increases in early 2009 and base effects from gas and heating price increases in the last quarter of 2008, the EC said in its forecast.
Government debt, meanwhile, is predicted to expand to 43 percent of GDP by 2010, up from 9.5 percent of GDP in 2007.

Unemployment, which last year reached 6.5 percent, is likely to rise to 10.4 percent in 2009 and to 11.4 percent in 2010.
The forecast for Estonia and Lithuania was only slightly better than Latvia's, though the countries still have some of the gloomiest outlooks in the EU.
The European Commission said that the Estonian economy was predicted to shrink by 4.7 percent 's nearly double the expected decline for 2008. The European Commission forecast economic growth for Estonia in 2010, when the country's gross domestic product in expected to increase by 1.2 percent.
According to the new forecast the level of unemployment in Estonia will grow to 8.8 percent this year and 9.7 percent next year.

The forecast shortfall of the state budget with respect to GDP will be 1.6 percent this year and 1.3 percent next year. For 2008 the European Union forecast the Estonian shortfall at 2.8 percent.
Lithuania saw the most positive outlook of the three Baltic states, but the most recent forecasts for the country were still significantly worse than previous estimates.

"The economic outlook for Lithuania has deteriorated sharply, with the global economic and financial crisis contributing to the deepening of the domestic cyclical downturn," the Commission said.
The report predicted that the Lithuanian economy would shrink by as much as 4 percent in 2009, and by another 2.6 percent next year. The drop comes on the heels of an expected 3.4 percent GDP growth in 2008.
At the same time, unemployment is likely to rise to 10.2 percent next year from 5.4 percent in 2008.
The commission also said, however, that the government's anti-crisis plan could have a positive effect on the economy 's making the coming recession somewhat shorter and less severe.

"The European Commission hopes that the measures put forward by the new government will mean that the recession in Lithuania will be shorter, and in 2010, even with negative growth, things will be better for Lithuania," Joaquin Almunia, European Commissioner for Economic and Monetary Affairs, told journalists on Jan. 19.

The GDP of the whole EU in 2009 is expected to drop 1.8 percent before a slight rebound in 2010.
According to the latest EC prognoses, economic growth both in the EU and the eurozone declined to 1 percent in 2008 from nearly 3 percent in 2007.