Analytics, Baltic, Economics

Experts are forecasting that their economies could shrink by 10% in 2009, writes LETA.

Activity began to slow sharply at the beginning of last year and then went into meltdown as global growth was brought to a shuddering halt by the financial and banking crisis.

Now the tigers are on their knees, or nearly.

Latvia leads the economic retreat, with Estonia and Lithuania not far behind as activity, once fuelled by robust demand and easy credit, is torpedoed by the credit crunch.

Latvia showed the fastest economic growth in the European Union in 2006, expanding its gross domestic product by 12.2%.

But in December last year it had to seek a bailout of 7.5 billion euros (9.6 billion dollars) from the International Monetary Fund and other lenders after the government nationalised its second-biggest bank, Parex.

Commercial banks such as SEB and Swedbank of Sweden now forecast that the economy will contract, or go into reverse, by seven to 10% this year. The Latvian central bank agrees.

The economy could even contract by 15%, SEB bank chief economist Andris Vilks told AFP.

Noting that Latvia fell into recession in the second quarter of last year, Baltic economist for Danske Bank Violeta Klyviene told AFP she expected the slump to continue in 2010. "It is difficult to say how deep it will be," she said.

Meanwhile, analysts forecast that planned public sector job cuts, further budget cuts and tax rises, could risk spark more street protests in Latvia.

The Estonian economy contracted by 3.6% in 2008 after shrinking in all four quarters of the year, according to preliminary official data on Friday. With fourth-quarter data also showing a huge 9.4-% contraction over 12 months, experts there forecast that the recession this year would be even deeper than expected.

Estonian authorities estimate that GDP could shrink by 4.5-8.9% this year, before slowly recovering to achieve 1.5-% growth in 2010.

In 2006, the EU newcomer roared ahead with growth of 10.4%.

The government of Prime Minister Andrus Ansip has denied seeking a bailout with international lenders similar to the one agreed in Latvia.

Unemployment in Estonia, where the population totals 1.34 million, could spike to 100,000 in the near future, the chairman of the Estonian Employers' Confederation, Enn Veskimagi, said.

The latest data from the Estonian statistics office showed the unemployment rate jumping to 7.6% in the fourth quarter, equivalent to 54,000 people unemployed.

The rate for the year was 5.5%.

So far Lithuania, with 3.4 million inhabitants, is the best-placed of the three small Baltic countries, since it is expected to report growth of 3.2% for last year.

But recession knocks and is expected to strike this year. The central bank is forecasting contraction of 4.9%.

"From a technical point of view, Lithuania hasn't yet entered a recession – only the fourth quarter of 2008 showed negative growth (minus 6.1%)," Lithuanian central bank official Raimudas Kuodis told AFP.

But senior analyst for commercial bank DnB Nord, Rimantas Rudzkis, forecasts that recession will hit after the first quarter of 2009.

"The first quarter of this year will be very bad with negative 7-% growth in the best-case scenario," he told AFP.

"There will be no improvement in 2010, but in 2011 it could get better if the government makes deep spending cuts, economic reforms and overhauls post-secondary education," he said.