After two very strong years of growth, when economic growth sometimes even exceeded 5%, economic growth in the Baltics is expected to moderate under the influence of increased headwinds from the global economy. In Latvia 2019 has begun with the slowest growth in the past 3 years for the Latvian economy, and GDP has grown by just 3% in the first quarter of this year compared with the same period last year. While slower growth was to be expected this year; however, such slow growth for the Latvian economy in the first quarter was an unpleasant surprise. Meanwhile, growth in Lithuania has remained stable at 4%, while in Estonia GDP growth unexpectedly reached 4.5%.
The main reason for slower growth is certainly the global headwind and slowing down of external demand. The International Monetary Fund (IMF) predicts in its latest World Economic Outlook that growth will be slower than last year for 70% of the world’s economies, and the world in general should expect its weakest growth since 2009. IMF data for the first quarter shows that we may be starting to feel this in the Baltics, however, I don’t believe that we currently have any cause to talk about a global recession.
The domestic economic cycle looks stable enough for the moment. Consumption is growing steadily. However, construction in Latvia started the year with growth of just 7.4%, demonstrating that the cycle in this industry is slowing down. Two years ago, growth in construction was over 20%, so this decrease is even desirable, because signs of overheating are visible in the industry. The growing number of construction permits issued does show that demand in the private sector remains very strong, but we are reaching the maximum point in gaining EU funding, and there will be no additional stimulus from the public sector in the industry this year. Construction cycles are not synchronised between the Baltic states, and growth in the construction industry in Lithuania during the first quarter increased to 15%, while in Estonia the number of construction permits issued has been falling since 2017 and construction output increased by only 2%. This seems to show that the construction cycle there is also close to its maximum point.
Due to weaker external demand and slowing down of the construction cycle, it is expected that the Baltic region will grow more slowly in 2019 than in the previous 2 years, with growth being close to 3%. In addition, last year, high wood prices promoted additional logging and a growth in wood processing in the Baltics while the Latvian economy also benefited from several one-time factors that could show a negative this year. Despite Russia’s goal of reducing the use of Baltic ports, transit grew last year and the macroeconomic data only partially reflect the outflow of non-resident deposits from the banking sector.