RIGA - The Baltic economies are expected to continue their torrid rate of expansion this year and next and will retain the fastest rates of growth among EU members countries, the European Commission said in its spring economic forecast.
According to the commission's estimates, the gross domestic product of Lithuania is expected to grow 6.9 percent this year and 6.6 percent in 2005. Latvia's economy is forecast to expand by 6.percent in both 2004 and 2005, while Estonia's GDP growth would reach 5.4 percent this year and then accelerate to 5.9 percent next year.
In Latvia, the main engine for economic growth will be private consumption, which in turn should foster higher wages and availability of loans. Investment growth in Latvia is forecast at 10 percent in both 2004 and 2005. The recovery in the EU and the pegging of the Latvian lat to the euro will contribute to Latvia's export rise, the report said.
The European Commission stressed that the EU's poorer incoming states are growing at over twice the rate of current members, a pace set to accelerate as they catch up with the current member states.
The commission puts GDP for the 10 EU newcomers at an average of 4.0 percent this year, though this will rise to 4.percent in 2005.
But the EU executive warned that joblessness would remain stubbornly high in the East European countries due to join the bloc on May 1, while inflation is also expected to increase and government deficits remain relatively high.
Indeed, unemployment remains a stubborn problem across the region. After peaking at an average of 14.8 percent in 2002, it has declined slightly but is forecast at 14.1 percent this year and 13.8 percent in 2005.
The other macroeconomic problem for the Baltics is inflation, particularly in Latvia. Consumer prices there rose by 4.8 percent from March 2003 to March 2004, and analysts have started sounding the warning bells.
Scandinavia's Skandinaviska Enskilda Banken last week raised its 2004 inflation forecast for Latvia from 3.7 percent to 4.percent, highlighting that inflation could be the country's biggest economic challenge in coming years.
The report, the bank's latest on Baltic economic development, stated that inflation in Latvia is partly due to the regulated energy tariff hike, though food prices have also gone up as have imported goods due to a drop in the lat against foreign currencies.
The effects of the country's accession could also boost inflation by around 1 percent, the report said.
SEB stated that it expected the Bank of Latvia to raise the refinancing rate again this year after moving it up form 3 percent to 3.5 percent last month, adding that this should not really affect inflation, current account deficit or fiscal policies.
The Bank of Latvia has already stated that consumer prices were likely to top 4 percent this year.
In Estonia and Lithuania inflationary pressure is less dire. The Estonian Finance Ministry expects prices to rise 3.1 percent this year, while the Lithuanian Finance Ministry has forecast inflation of 1 percent in 2004.