Strong growth expected to slow

  • 2011-05-18
  • From wire reports

TALLINN - The Baltic economies of Estonia and Lithuania will probably slow from first-quarter peaks as capacity constraints limit exports, their main growth engine, and demand from abroad wanes, analysts said, reports Bloomberg. Having been hit hard by the global economic crisis, Estonia and Lithuania notched the quickest growth rates in at least three years as austerity helped improve competitiveness, which fuelled exports and manufacturing. Their pace was the fastest among European Union nations that have reported first-quarter data. Latvia also outpaced most developed nations.
“Baltic first-quarter growth results were likely a peak for the cycle as export capacity limits have more or less been reached and there’s no room for domestic policy stimulus if external demand softens, as I suspect it will,” said analysts including Neil Shearing at Capital Economics.

Capacity utilization in Estonia, where gross domestic product grew an annual eight percent in the January-March period, averaged 72 percent in April, according to the privately owned Konjunktuuriinstituut research institute. That’s the highest in three years and close to the 80 percent peak in October 2006.

Estonian exports rose an annual 53 percent in the first quarter, reaching a monthly record in March. Export growth has mainly been powered by rising demand for wireless network equipment and mobile phone handsets manufactured at the local plants of Sweden’s Ericsson and Luxembourg-based Elcoteq.
“The biggest contribution to Estonian industry is from electronics and optical equipment, which are directly tied to Ericsson. The fast growth began last June-July, so we should see a slowdown starting in these months due to the base effect,” said Annika Paabut, chief economist at Swedbank in Tallinn.

Lithuania posted first-quarter growth of 6.9 percent. Exports, which reached a record 5.4 billion litas (1.5 billion euros) in December, will probably increase by at least 22 percent this year, the Finance Ministry said in March. The Orlen Lietuva refinery, the nation’s biggest exporter, said at the time that crude processing grew 27 percent in the first quarter.
Latvia, whose economy contracted the most during the crisis, has been slower to recover. GDP expanded 3.4 percent in the first quarter, lower than all eight estimates in a Bloomberg survey. The Baltic nation took a 7.5 billion euro loan package from a group led by the European Commission and International Monetary Fund following a government bailout of its second-biggest bank.

“There are a number of risks that may further impede the recovery of domestic demand this year, in particular fiscal consolidation and accelerating inflation,” Violeta Klyviene, an economist at Danske Bank in Vilnius, said in an e-mailed note on May 10.

Latvia’s budget shortfall may narrow to four percent of GDP this year and about two percent in 2012, Finance Minister Andris Vilks said last month. Lithuania’s deficit will shrink to 3.8 percent next year from an estimated 5.3 percent in 2011, Fitch Ratings forecast last week.
Estonia, the only EU member to post a budget surplus last year and the nation with the lowest public debt in the 27-member bloc, is less dependent on export demand than its Baltic neighbors, said Jekaterina Rojaka, a Vilnius-based chief economist at DnB NORD Group.

“Estonia, having no specific restraints over the public sector, is likely to enjoy a broader recovery compared to the other Baltic states, which are still struggling with further fiscal consolidation,” Rojaka said.
The country’s economy may expand about five percent in 2011, the Finance Ministry said on May 12. Lithuania’s Finance Ministry raised its growth forecast to 5.8 percent on March 16 from a September estimate of 2.8 percent. The Latvian government predicts 3.3 percent expansion.

Officials see the recovery as proof that austerity has helped regain competitiveness lost during an economic boom that began in 2004 and ended four years later when a real estate bubble burst, credit markets froze and exports collapsed, erasing more than a fifth of the region’s economic output.

“A bit of austerity and belt-tightening, both in the public and private sectors, have made the economy stronger and more capable to evolve than it was before,” said Estonian Finance Minister Juergen Ligi.
Eesti Pank economist Peeter Luikmel said on May 12 that the very fast expansion has partly been driven by one-off factors and the growth rate is forecast to slow in the second half of the year.

According to the flash estimates of Statistics Estonia, the gross domestic product of Estonia grew by eight percent, year-on-year, in the first quarter of 2011. Growth was dynamic also on a quarterly basis: the first-quarter GDP increased by 2.1 percent compared to the fourth quarter of 2010. The last time the first quarter showed such vigorous growth was in 2007.