Analytics, Baltic States – CIS, Economics, EU – Baltic States, GDP, Latvia

Previously, Swedbank predicted that the Latvian economy would increase 3.5% in 2012.

According to Swedbank predictions, the Latvian economy will be growing faster than the average growth projection for the Baltic region where a 3.6% growth is forecast for this year, 2.6% for 2012 and 2.9% for 2013. Yet, Latvia's growth projections are lower than those for Estonia: 7.6% this year, 3.2% next year and 3.8% in 2013, as well as for Lithuania: 6.3% this year, 4.2% in 2012 and 4.2% in 2013, writes LETA.

According to Kazaks, the economic growth of Latvia continues, however, global economic development pace is decelerating and competition among countries is increasing – factors that hinder Latvia's growth.

"Although the risk of recession has increased, the largest developed countries of the world can avoid a repeat recession yet, and Swedbank base scenario at the moment does not provide for a repeat recession. If the cooperation between financial markets and economic policy shapers is successful, if European Union politicians act swiftly and correctly, the EU still has a good chance of avoiding an economic recession," stressed Kazaks.

Since this past August, when Swedbanka Economic Research Department presented its previous forecasts, the global environment has become more insecure, explained Kazaks, adding that back in August a repeat recession was considered a 30% possibility, whereas now the figure has increased slightly.

"The uncertainty and the risk of recession have increased in the world's developed countries. Nevertheless, "trudging on" still remains the base scenario, and Swedbank economists believe that the world can avoid a new global recession similar to the crisis caused by the "Lehman Brothers" bankruptcy," said Kazaks.

As for what politicians should be doing now, Kazaks said that at the moment euro are politicians were too slow in responding to questions posed by the financial markets, which was making the financial markets self-confident and aggressive. "Politicians must react swiftly and take bold decisions. First, they must be cautious when drawing up the state budget. Banks in the large EU member states – Germany, France, Italy and Spain – must be recapitalized, sufficient capital must go into these banks so they could survive the debt crisis. The euro area must reach agreement on a harmonized fiscal policy. If the fiscal policy is not coordinated, some countries may go bankrupt. The reason for the current crisis is, to a great extent, the belief that bankruptcies are impossible in the eurozone," stressed Kazaks.

Despite gearing down, the Baltic Sea region moves forward providing rewarding business opportunities, Swedbank reports. The Gross Domestic Product (GDP) of the Baltic Sea region is expected to grow by 3.6% this year, but a slowing global business cycle weakens the recovery and we expect growth rates of 2.6% in 2012 and 2.9% in 2013. Despite gearing down, the outlook is better than in other parts of Europe.

The structural index – Baltic Sea Index – indicates that the region's business climate and competitiveness remain strong again this year (seven out of ten). Education ranks high, but there is room for improvement, not least in the areas of entrepreneurship, labor market and taxes.

Germany - the largest economy of the region - is expected to reach a GDP growth of 1.1% next year and 1.5% in 2013, which is a major slowdown compared to 2.9% this year. Labor market reforms have so far paid off. Structural policy is now focused on bank recapitalization and consolidation.

Estonia shows the highest growth rate in the region, followed by Lithuania. The recovery in the Baltic countries is expected to continue, reaching growth rates of three-four percent per year. Although these countries are export dependent, earlier imbalances have been reduced and the resilience against global turmoil is greater.

A slowdown will nevertheless complicate the reform process – in Latvia and Lithuania the goals are to reduce the budget deficit and inflation rate, and to enter EMU in 2014.

Macroeconomic imbalances in Poland have increased in recent years, as suggested by higher inflation rates, and deficits in the fiscal and current accounts. Remedial policy action is reducing these imbalances, while economic growth is expected at respectable rates of three – 4%. Poland is not in a hurry to enter the EMU, but instead waits for the euro crisis to be resolved, and thus allows the fulfillment of the Maastricht criteria to take its time.

GDP growth in Russia and Ukraine are expected to barely exceed four percent, and the dependence on high commodity prices is considerable. Reforms are pushed forward, and the vulnerability to global commodity markets is significant. The urgent need for reforms is reflected in the Baltic Sea index, which ranks the two economies at the bottom in the region.

The Nordic countries are found at the high end of the Baltic Sea index with strong business climate. Also the economic outlook is relatively positive. Following a slowdown next year, GDP is expected to grow by about two percent in 2013. Real economic growth in Sweden is forecast at 1.1% in 2012 and at 2.2% in 2013. Should the fall in external demand deepen, the vulnerability of the business cycle and real estate developments are exaggerated by the elevated household debt ratios.