Baltics Outlook | Steering economies through difficult waters
Global developments continue to shape the outlook
After last year’s brisk GDP expansion and good start of this year, economic growth is set to decelerate visibly in 2022. In its latest summer forecast, the European Commission sees this year’s average GDP growth at only 1.6% in Estonia, 1.9% in Lithuania and 3.9% in Latvia. Even though private consumption is expected to help GDP growth, soaring inflation is eroding the purchasing power of households and will dent their consumption.
Elevated uncertainty, trade disruptions linked to the war in Ukraine and commodity price increases are weighing on investment and trade flows. Economic growth is expected to pick up some speed next year, helped also by sizeable Recovery and Resilience Facility funds.
The Baltics used to be highly exposed to Russian gas but have done major steps to reduce this dependence in the past months. Lithuania has managed to become the first EU country to wean itself off Russian piped gas. The rest of the region is following suit, with plans to phase out their Russian gas dependency by the end of this year.
Inflation continues its strong march upwards, as evidenced by the latest flash June figures that show 19-22% y/y increases for the Baltics. The key culprits behind soaring inflation rates are food, energy and housing, as well as transport prices. The national governments have introduced various support schemes geared at cushioning the impact of high prices on people and companies.
The EC expects this year’s average inflation to reach 15.5% in Latvia, and 17% in Estonia and Lithuania. As price pressures ease – the EC anticipates that prices of imported energy and other commodities may go back to pre-war levels by end-2023 – inflation should slow down gradually.