Domestic demand returning to Baltics

TALLINN - The economies of Estonia and Lithuania will probably expand faster than previously expected on export growth and recovering domestic demand, says Swedbank, reports Bloomberg. Estonia’s economy may expand 4.5 percent this year and next, compared with a Jan. 13 estimate of 4.2 percent for 2011, notes the bank in an April 7 report.
Swedbank raised its Lithuanian 2011 growth forecast to 4.2 percent from a previous 3 percent. The economy may grow 4.7 percent in 2012, it said.

After suffering through the worst drop in economic output in the world, the Baltic countries of Estonia, Latvia and Lithuania have been growing on a quarterly basis since the beginning of 2010. The region relies on exports, benefiting from rising demand in Western Europe.
 “Domestic demand will gradually replace exports as the main source of growth, with investments as the main factor” in Estonia, the report said. “Private consumption will recover only slowly due to modest wage developments, increasing prices, and lingering unemployment.”

Swedbank kept Latvia’s 2011 growth forecast unchanged at 4, while slashing the 2012 estimate to 3.9 percent from a previous 4.2 percent. Accelerating inflation in Latvia and Lithuania risks jeopardizing euro adoption targeted for both countries in 2014. Latvia’s inflation rate may average 4.2 percent this year, while Lithuania’s consumer prices may rise 3.2 percent, driven by global commodity price increases.
“Unless action to hold back inflation is undertaken by the government, there is a risk of exceeding the Maastricht inflation criterion for introducing the euro in 2014,” the report warned. Swedbank called on the governments to strengthen competition, improve efficiency in the energy sector and called against increases in the value added or excise taxes to mitigate inflation pressures.

The Estonian Finance Ministry in its spring forecast says that the economy will grow this year and next year at 4 percent, reports National Broadcasting. The growth engine will continue to be exports, which will bring a gradual improvement in consumer confidence and domestic demand, the ministry said.

The ministry believes that next year, an increase of domestic demand caused by an increase of private consumption spending and investments will contribute to the economic growth. “The recovery of the economy, including an increase of employment, has been faster than expected and the growth rate among the highest in the EU. Bigger numbers would presume a higher level of domestic demand and investments already. Inflation is still dictated by the international food and fuel prices and other, bigger risks are currently in the foreign environment also,” said Finance Minister Jurgen Ligi.
The fast recovery of the economy has resulted in growing work volumes of companies and thus there is new need for staff. Thus, the number of employed is expected to grow by 2.2 percent and unemployment should fall to 13.5 percent as the average for the year. Unemployment is forecast to fall below 10 percent in 2014, and will be 8 percent in 2015, which for Estonia should be a normal unemployment level.

The wage level increase is expected to be 3.5 percent this year and by 2015, over 5 percent. The ministry forecasts the price increase at 4.5 percent this year and 2.8 percent in 2012. Inflation should stay at around that level for the next three years.
Estonia qualified for euro adoption as inflation accelerated from March 2010, following 10 months of deflation. Quickening price growth threatens to stifle the recovery in domestic demand, while export growth will probably slow, the central bank has said in past months.