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Swedbank expects GDP to shrink by 5.8% this year in Latvia and by 5% in Lithuania and Estonia
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    Swedbank expects GDP to shrink by 5.8% this year in Latvia and by 5% in Lithuania and Estonia

    RIGA, March 25 (LETA) - Swedbank expects gross domestic product (GDP) to fall by 5.8 percent this year in Latvia and 5 percent in Lithuania and Estonia, according to the latest economic outlook published by the bank.

    At the same time, the bank expects growth to return in the Baltic States next year at the same rate as this year, with Latvia forecasting economic growth of 5.8 percent in 2021, and in Lithuania and Estonia - by five percent in each.

    Latvian GDP growth is expected to disappoint already in the first quarter of 2020, and the economy will likely see a material drop in the second quarter – probably the sharpest quarter-on-quarter fall in GDP ever recorded. However, it is assumed that the coronavirus shock is to be limited in duration, with activity restarting in the second half of the year. The fiscal support extended by the government will help businesses stay afloat, which will then ensure a rather steep rise in activity 

    from the very subdued levels seen during the lockdown, the bank points out in its report.

    The first to feel the hit are businesses in transport, accommodation and food services, arts and recreation and non-food retail trade, as well as those providing business-to-business services for these sectors. The first-in-line sectors account for around 18 percent of GDP, and activity in some of these might fail to swiftly recover even after the lockdown is lifted due to prolonged weakness in consumer confidence. Supply-chain disruption and a decline in external demand will lead to plummeting exports, which will be reflected in the poor performance of a large part of the manufacturing sector, according to the report.

     

    For about one third of the economy the effects will be smaller, and activity in a few sectors might even increase. Rising demand will be felt in certain industries like food production, and manufacturing of disinfectants and other medical supplies, Swedbank emphasizes. 

    Many companies will try to minimize costs, including labor costs. This will lead to a pick-up in the unemployment rate. The increase in the unemployment rate will be limited due to the assumed short duration of containment measures and the pronounced labor shortages before the outbreak.  Companies will abstain from sacking staff if possible. The unemployment rate will start to decrease gradually as the economy recovers in 2021, the bank goes on to say.

    Wage growth is expected to slow considerably as most companies cut back on bonuses, use of overtime work declines, and some companies reduce wages. 

    Wage growth will rebound as the economic recovery kicks in 2021. Initially, however, the pace of growth is likely to remain below the pre-crisis rates, Swedbank points out in its report about Latvia.

    Inflation will be very subdued in 2020, due to both a drop in demand and the low global oil price. The  unprecedented stimulus measures (so far, a package amounting to 6.6 percent of GDP has been announced) will imply a sharp increase in the budget deficit and will also result in a pick-up of the otherwise comparatively low government debt. It is fortunate that the Latvian economy enters this crisis in a much better shape than the previous one, increasing the chances of better weathering this downturn, Swedbank points out.

    Meanwhile, Swedbank has also reduced Latvia's inflation projections for this year - from 2.4 percent to 0.5 percent, and from 2.4 percent to 1.6 percent in 2021.

    In Lithuania, meanwhile, Swedbank has reduced its average annual inflation rate projection from 2.7 percent to 1 percent this year, but raised it from 2.5 percent to 3 percent next year, while Estonia's annual average inflation rate has been lowered from 2.3 percent to 1 percent this year, but from 2.2 percent to 2 percent for the following year.

    • Published: 25.03.2020 11:44
    • LETA
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