The external environment becomes less favourable and risks increase

The economies of the Baltic states continue to grow and domestic consumption remains strong, however, the external environment has become less favourable, and the largest risks to the development of the Baltic region this year are certainly linked with external factors. Since the second half of last year, in almost all of the world’s largest economies, manufacturers’ outlook has significantly worsened, and global trade has seen its largest fall since 2009. Meanwhile, in Europe, we can already talk about a manufacturing recession. These trends have not yet significantly affected the Baltic region, however, the IMF’s latest World Economic Outlook predicts this to be the weakest growth year since 2009, and in the past year, the Eurozone growth prediction for 2019 has almost halved to around 1%. The growth forecasts for the Baltic region for this year have remained unchanged, but the risks associated with the external environment have certainly grown.

At the moment, the weakest link of the global economy is manufacturing and global trade of goods, where the negative results is mostly linked with a fall in auto, microchip and other IT component manufacturing. This is due to both reduced demand in China and changes to the product cycle, with smart device markets becoming increasingly saturated and auto manufacturing experiencing emissions scandals, as well as changes in technology and changes to consumer habits. In addition, European manufacturing has been negatively affected by the weather, its high dependence on the external market in general, and specific shocks such as the economic crisis in Turkey, which is a significant enough market for Germany.

The good news is that short-term statistics on the global economy sooner point to the current drop in growth pace as a passing weakness. Consumption in the largest economies remains strong, and service industries continue to grow. Therefore, in the second half of the year, economic growth should become faster once again. This means that, in my opinion, there is no basis for talking about a global recession, however, manufacturing is a leading industry, and prolonged weakness there would certainly affect other industries.

Reacting to the slowing down of growth and a worsening of economic outlook figures, the Federal Reserve System of the United States has paused the raising of the base interest rate, while the ECB plans not to change interest rates until at least the end of the year, releasing a new, longer-term refinancing operations rate for banks. China has also strengthened its economic stimulus programme. These steps will promote the growth of the global economy, however, it continues to be threatened by various risks such as unresolved trade wars, a further slowing down of world trade, as well as manufacturing, the uncertainty surrounding Brexit, and the high level of debt in Italy, which threaten the stability of the financial system. Therefore it is difficult to foresee any positive surprises from the external environment this year.

Further articles:
Under the influence of the global economy headwind, growth in the Baltics becomes more moderate
Europe’s industrial recession not yet felt in the Baltics
Construction on the verge of overheating