Mike Collier in Riga -
Danske Bank issued a trio of macroeconomic reports on July 31 that deliver a simple message despite their weight of detail: the Baltic states are in big trouble.
According to Danske's "North Eastern Recap" report, "a hard landing scenario has become a reality for Estonia," while Lithuania too "could experience quite a hard landing." As for Latvia, the situation looks worst of all and Danske goes so far as to predict that GDP growth will all but disappear until 2012-13.
Until recently, many Baltic economy watchers have seemed blissfully unconcerned by the region's economic troubles, trotting out a line that though inflation is steepling and the property market is going backwards, everything will probably start to get back on track in the third or fourth quarter of 2008. But Danske's latest assessment (and Danske has historically been a lot more sceptical than indigenous institutions) blows all that away, swapping the ecocnomic blip of the optimists for a real and protracted recession.
The three terrors
Estonia, once the darling of Baltic investors, looks to have fallen harder and faster than many would have thought possible. Consumer confidence has evaporated thanks to a combination of high inflation and tighter credit conditions. And consumers who took advantage of previously loose credit conditions are starting to worry about keeping up their repayments.
Estonian GDP growth was a barely-visible 0.1% in the first quarter, and Danske expects it to go negative in upcoming quarters creating "a high probability of a negative result for the whole of 2008." Growth will then remain "very subdued" deep into 2009 with real recovery delayed until 2010 when it predicts GDP growth will get back to its long-term trend of 4%.
One consolation is that the seriously overheated Estonia labour market is starting to cool down thanks to increased competition and new legislation aimed at promoting greater flexibility, which Danske describes as "an important step forward."
If Estonia's hard landing has happened, Lithuania's still seems to be circling the airport, while Latvia's landing is more of the Qantas emergency variety.
Lithuanian GDP growth slowed to 5.5% in the second quarter from 7% in the previous quarter and the trend looks set to continue. Danske's best guess is that annual growth will amount to 4.4% for 2008 and 2.6% in 2009, provided export levels to Russia can be maintained - not a done deal by any means in view of Lithuania's eagerness to host American missile bases and worsening relations. "We believe it is the most pro-cyclical of the Baltic states, and looking ahead we fear that we will see further slippage in fiscal policy as the economy slows significantly," says Danske. Add an energy crisis provoked by the closure of the Ignalina nuclear power plant at the end of 2009 and it looks like Lithuania could fend off one recession just long enough to plunge straight into another one.
Finally, the Danish bank turns its beady eye on Latvia, and it doesn't like what it sees. Latvia notoriously possesses the EU's highest inflation level at 17.7% and it's likely to keep that dubious distinction with forecast average annual inflation for 2008 of 17.3% and no meaningful reduction until the second half of 2009.
But at least inflation will play its part in helping to divest Latvia of another unwanted table-topping statistic, namely its yawning current account deficit (12.4% of GDP, actually just overtaken by Iceland's 16.5%). Even though export growth will weaken, imports are set to weaken even more quickly with consumers expressing all the confidence of a first-time pilot being talked down by air traffic control.
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