Another down year for Baltics

VILNIUS - Estonia, Latvia and Lithuania are expected to remain in recessions this year, as an export-driven recovery takes hold later than officials expected, say analysts at Danske Bank, reports Bloomberg. The Lithuanian economy may shrink another 3 percent this year, instead of the government’s forecast of a 1.6 percent expansion, say the number crunchers.
Estonia’s contraction may reach 1.8 percent, rather than the government’s 0.1 percent estimate, and Latvia’s output may drop 4 percent instead of less than 2.5 percent the central bank is calling for.

These forecasts are the most pessimistic of the past two months from the bank. The Baltic states continue to log the European Union’s biggest economic declines. The collapse of their credit-driven boom was exacerbated by the global financial crisis, forcing the three governments to introduce austerity measures to curb exploding public budget deficits, adding to economic woes.

“Uncertainty remains about a sustainable recovery,” says the bank’s Vilnius-based economist Violeta Klyviene. “The most difficult part for the region is over. We’re the most pessimistic about the trends of domestic demand and more conservative than others about export recovery.” Preliminary numbers show the Lithuanian economy shrinking 13 percent in the fourth quarter, while Estonia’s output declined 9.4 percent and Latvia contracted 17.7 percent in the same period.
Swedbank, slightly more optimistic, said in January that Estonia’s GDP may grow 1.5 percent this year. Latvia’s economy will contract 3 percent this year and Lithuanian output may shrink 2 percent, it said.

A recovery in Latvia, an international bailout recipient in the same boat as Hungary, Iceland and Romania, may begin this year, though the analysts say it “will be fragile as full-year average growth will remain negative, driven solely by external demand,” said Danske.

In Lithuania, “we expect a more sustained export-driven recovery to begin no earlier than in the second half,” the analysts add. In Estonia, “uncertainties regarding the more optimistic growth scenario still remain high. The key for a better outcome would be a more positive export-oriented industry performance. We don’t have tangible evidence of this as yet.”
Lithuania ceased energy production at its Soviet-built Ignalina nuclear power plant on Dec. 31 to fulfill the country’s promise to the EU before it joined the bloc in 2004. Prices rose 1.3 percent in January from the previous month, driven by a 33 percent increase in electricity costs due to the closure.

“There is a risk that, due to the rise in energy prices, we would see a contraction quarter-on-quarter again in the first quarter,” warns Danske. “An electricity rate hike would undoubtedly hit the industrial sector.”