Analytics, Economics, EU – Baltic States, Financial Services, GDP, Investments

According to the EY report, Latvia's economy will grow by about 3.4% next year, but Lithuania is expected to see growth at around 4.5%, which means that after several years of posting the highest growth in Europe, Latvia will no longer be the fastest growing economy, at least in the eurozone.

''After a slowdown to 2.8% this year, reflecting eurozone and Russia trade restraints, Latvia’s GDP growth is forecast to pick up to 3.4% in 2015 and above four% in the medium term. Export growth will drive the initial recovery and stay strong throughout the forecast period,'' the report points out.

The reports also points out that investment in Latvia will also pick up more strongly from 2016, boosted by low interest rates and widening trade opportunities helped by eurozone entry. ''And the current account will move into surplus in 2015, lessening reliance on capital inflows,'' EY emphasizes.

''The relaxed ECB monetary stance and an ongoing fiscal deficit will fuel faster inflation and wage growth in Latvia, ensuring that consumer demand can rise, as well as household saving,'' the report goes on to say.

According to the report, private consumption will increase by three% next year, but in 2016 by 3.4%. At the same time, a 3.7% increase in exports is expected next year, but from 2016 to 2018 the increase in exports will exceed 4 to 5% each year.

''Overheating is a risk in 2016–18, but should be avoidable if skill shortages are averted and productivity growth is maintained,'' EY point out.

The report also goes on to say that Latvia's GDP will continue to steadily increase in the coming years – by 3.4% in 2015, 3.9% in 2016, 4.4% in 2017, and 4.5% in 2018.

''Political risks have eased since the election increased the ruling coalition’s majority, but more spending on defense and energy diversification appears likely,'' the report goes on to say.

After a relatively encouraging first three quarters, the final months of 2014 have seen the pace of  recovery slow and a revival of fears about the Eurozone’s long-term future. We now forecast GDP growth of 0.8% this year, down from the 0.9%% projected in our September report. We expect growth to pick up to 1.2% in 2015 and 1.6% a year in 2016-18.

But despite the indisputable problems in the Eurozone, this edition of the EY Eurozone Forecast does find some reasons to be positive.

Growing exports, restored business confidence, rising domestic demand and an improving labor market should all support growth.

However, we are concerned about the Eurozone’s vulnerability, although it looks set to continue its recovery from the last crisis. With 12 Eurozone member states’ public debt above 90% of GDP, governments have minimal room for fiscal stimulus.

Latvia (annual percentage changes unless specified)

Source: Oxford Economics.

Estonia (annual percentage changes unless specified)

Source: Oxford Economics.