Growth in the Baltics is slowing down

As the global growth slows down, economic growth in the Baltics is decelerating, but compared to the euro area as a whole, growth rates in the Baltic region remain very good. In the second quarter GDP in Lithuania grew by 3.9% in and by 3.6% in Estonia compared to the previous year, while GDP in Eastern Europe increased by 3.5%. At the same time Latvia's GDP grew by only 2.0% in the second quarter, which is the slowest rate economic growth in the last 3 years. Such a low growth is an unpleasant surprise, but mostly caused by one-off factors such as dry weather and falling electricity production, declining transit loads and wood price adjustments, as well as the short-term negative effects of changes in the financial sector.

After two very good years in the economy, when construction volumes in the Baltics grew by more than 10-30% per year, slower growth was expected this year, but this time it coincided with the slowdown in the global economy. In the in the second quarter construction volumes in Lithuania grew by 9% and by only 1% in Latvia while construction volume in Estonia declined by 1.3%. Weaker growth in construction sector largely due to already high level of EU fund investment which is expected to remain at current levels in the next few years, while private sector demand remains strong.

With a weaker external demand and deceleration in construction sector, overall economic growth in the Baltic region is increasingly dependent on domestic consumption and export of services, especially in IT and business services, which have long been the fastest growing sectors in the Baltics for some time. In the second quarter, the output of professional services in Latvia increased by 8.9% while IT an communication services grew by almost 30% in Estonia and 3.2% in Lithuania. At the same time household consumption in Latvia and Lithuania grew respectively by 3.5% and 3.7%, while in Estonia household consumption increased by 1.2%. However, in Estonia consumption in the next few quarters is likely to benefit from the of excise duty on alcoholic beverages at the expense of alcohol sales in Latvia.

In the short term no significant improvements in the Baltic economy should be expected. The economic sentiment in the Baltic countries is worsening and the leading indicators on construction, manufacturing and world trade are disappointing. Therefore, by the end of the year the economic growth in the Baltic is likely to decelerate even further, while next year it will largely depend on the developments in the global economy and the extent of the current soft patch in the world economy.