Baltic Economies Face Mixed Fortunes Amidst Global Uncertainty
The OECD has released its latest economic outlook for the Baltic states, painting a picture of cautious growth tempered by uncertainties in the global economy.
Latvia: Steady Growth Predicted, Geopolitical Risks Loom
Latvia’s economy is expected to grow by a modest 1.9% next year, with a further acceleration to 2.5% predicted for 2026. These projections follow earlier estimates by the OECD in May, forecasting GDP increases of 1.8% and 2.9% for this year and next year, respectively.
Inflation is expected to remain relatively contained, with the consumer price index set to rise by 1.2% this year, 2% in 2024, and 2.1% in 2026. Unemployment, currently at 6.9%, is projected to gradually decline to 6.7% next year and 6.6% in 2026.
The OECD suggests that low inflation and steady wage growth will contribute to increased purchasing power for Latvian consumers. In addition, the acquisition of European Union funds should bolster public investment, while lower interest rates will likely encourage both business and housing investments. With the recovery of key export markets, Latvia’s external trade sector is also expected to perform well.
However, geopolitical tensions and global economic instability present significant challenges. “Core inflation will remain high due to a strong increase in wages due to the shortage of workers and the large increase in wages in the public sector,” warns the OECD. “In addition, the growing geopolitical risks could hinder the growth of Latvia’s economy.”
Estonia: Recession in 2023, Followed by Modest Recovery
Estonia is braced for an economic contraction this year, with the OECD forecasting a 0.9% decline in GDP. A cautious recovery is projected for the following years, with growth rates of 1.7% and 2.7% expected in 2024 and 2026, respectively.
Consumer prices are set to rise by 3.4% this year, followed by further increases of 3.8% in 2024 and 2.8% in 2026. Unemployment is predicted to stand at 7.4% in 2023, decreasing slightly to 7.3% in 2024 and then to 6.7% in 2026.
Lithuania: Growth on Track, Inflation Under Control
The OECD anticipates a robust GDP growth rate of 2.4% for Lithuania in 2023, with further acceleration to 3.1% in 2024 and 2.8% in 2026. Consumer prices are projected to increase moderately, rising by 0.9% this year, 2.3% next year, and 2.4% in 2026. Unemployment is forecast at 7.4% in 2023, declining to 6.9% in 2024 and 6.3% in 2026.
What are the main challenges facing the Baltic economies according to Dr. Hansen?
## Baltic Economies Face Headwinds: An Interview with Dr. Annika Hansen
**Host:** Welcome back to “Global Outlook.” Today, we’re diving into the latest economic forecasts for the Baltic states, delivered by the OECD. Joining me is Dr. Annika Hansen, an economist specializing in the Baltic region. Dr. Hansen, thanks for being here.
**Dr. Hansen:** It’s my pleasure to be here.
**Host:** The OECD paints a somewhat mixed picture for the Baltic economies. While growth is projected, it’s “cautious” and tempered by global uncertainties. Can you elaborate on this?
**Dr. Hansen:** Indeed, the OECD’s outlook reflects the complex global landscape. While the Baltic states are expected to see modest growth, factors like the war in Ukraine, rising inflation globally, and potential energy price surges pose significant challenges.
**Host:** Let’s focus on Latvia. The OECD predicts a 1.9% growth for next year, up from an earlier projection of 1.8% growth this year. What’s driving this relatively slow growth?
**Dr. Hansen:** Latvia’s economy, like many others, is still recovering from the pandemic. Additionally, its heavy reliance on exports, particularly to neighboring countries impacted by the conflict in Ukraine, adds to the uncertainty. However, the government’s focus on attracting foreign investment and supporting domestic industries could potentially provide some buffer against these external shocks.
**Host:** Inflation appears to be under control, projected to rise by a moderate 2% in 2024. How achievable is this target, given the current global inflationary pressures?
**Dr. Hansen:** Controlling inflation will be a tightrope walk. While Latvia benefits from its currency peg to the Euro, global supply chain disruptions and rising energy costs exert upward pressure on prices. Achieving the OECD’s inflation target will require a combination of prudent fiscal policy and potentially some creative solutions to mitigate energy costs for both consumers and businesses.
**Host:** The OECD also projects a gradual decline in unemployment. Do you see this trend continuing?
**Dr. Hansen:** The projected decline in unemployment is encouraging, but it’s crucial to remember that Latvia’s labor market remains susceptible to fluctuations in global demand for its exports. Investing in skills training and promoting innovation
**Host:** Dr. Hansen, what would you say is the key takeaway for businesses and investors looking at Latvia?
**Dr. Hansen:** Latvia presents both opportunities and challenges in the current climate. While uncertainties persist, its commitment to reform, skilled workforce, and strategic location within the EU make it a viable investment destination for those prepared to navigate the global economic headwinds.
**Host:** Thank you for those insightful observations, Dr. Hansen.
**Dr. Hansen:** My pleasure.