|2022/03/02 / Erste Group Research|
Baltics Outlook | Gloomier outlook amid Russian invasion
Geopolitics constitute key risk factor to this year’s outlook for region. GDP growth to ease more than initially expected, due to high energy prices, dampened sentiment and likely halt of trade. Inflation to stay elevated for prolonged period of time.
Since the Russian invasion of Ukraine on February 24, the situation has been changing rapidly. The Western countries responded with far-reaching economic sanctions that will also negatively affect European economies. Higher commodity prices will push inflation and production costs up further, while trade with Russia, Belarus and Ukraine will effectively be frozen for the foreseeable future. Moreover, sentiment will be dampened by the increased geopolitical risk. The forecasts presented below do not incorporate the negative effects on the Baltics of the Russian invasion and introduction of sanctions.
Following the strong post-crisis recovery in 2021, growth dynamics will ease this year. The European Commission expects the Estonian economy to expand by 3.1% in 2022, Latvian GDP should increase by 4.4%, while Lithuania should grow by 3.4%. In light of the recent developments in Ukraine, the risks to the growth outlook are clearly tilted to the downside.
Similarly to the CEE region, inflation is hitting the headlines also in the Baltics, as it accelerated to levels not seen in a long time. Inflation is expected to peak in 1Q22 and should gradually decline thereafter as external price pressures should start to fade away and supply-side issues should further ease. Nevertheless, given the elevated inflation levels at the start of the year, the average HICP in 2022 is expected to land at 6.1% in Estonia, 5.9% in Latvia and 6.7% in Lithuania.
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|Author||Erste Group Research|
|Product name||CEE Economies Special Report|
|Topic in focus||FX, Macro/ Fixed income|
|Economy in focus||-|
|Currency in focus||-|
|Sector in focus||-|
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