Baltics | Back on track but with headwinds
Recovery is in full swing in the Baltics and all three economies returned to pre-pandemic levels as of 2Q21. Growth outlook remains favorable with risks related to pandemic. Inflation accelerated quickly and will remain above pre-crisis level in 2022.
Following relatively mild contraction in 2020, the Baltics have been recovering at a faster and stronger pace than initially anticipated. As of 2Q21, all three economies returned to their pre-pandemic levels. The European Commission expects FY21 GDP growth to land at an astonishing 9.0% in Estonia, 5.0% in Lithuania and 4.7% in Latvia. In 2022, growth should normalize at 3.6-3.7% in Estonia and Lithuania, while it should pick up to 5.0% in Latvia.
The main risks to the growth outlook are related to pandemic development, supply-chain disruptions and possibly weaker demand. From mid-September, the pandemic situation began to deteriorate across the Baltics, with new COVID-19 cases increasing rapidly and putting pressure on the healthcare system. The vaccine roll-out is uneven and remains below the EU average across the countries. Given the quickly worsening situation, Latvia became the first EU country to reintroduce a country-wide lockdown as of October 21. Strict rules are to remain in place until November 15.
Following easing in 2020, inflation returned to an upward trajectory across the Baltics. While still at the beginning of the year, the region was characterized by deflationary developments or muted inflation pressures, a massive increase in global prices quickly turned this into strong price growth. Besides external factors such as fuel and energy prices increase, CPI is also driven by strong wage growth. All in all, inflation will likely remain above its pre-pandemic level.