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2022/09/22 / Erste Group Research

Baltics Outlook | Slowdown is the order of the day

Outlook is misty amidst global risks and uncertainties

The Baltics face a tougher outlook, as economic slowdown is already underway amidst mounting uncertainties. In its latest available projections (from the summer), the European Commission (EC) expects this year’s average GDP growth at 1.6% in Estonia, 1.9% in Lithuania and 3.9% in Latvia. Yet, it is reasonable to assume that these forecasts will be revised downwards this autumn. Next year’s growth outlook is clouded with a lot of uncertainty. Whereas the EC forecast sees Estonia, Latvia and Lithuania growing by 1.9%, 2.2% and 2.5% in 2023, respectively, we expect these figures to be altered soon.

Uncertainty over the further development of the war in Ukraine, together with still elevated inflation in 2023 will likely continue to weigh on consumption and wider economic growth to some extent. On the other hand, some positive risks can be seen, as well – the Baltics will have had more time to diversify their import and export markets, further reducing their dependency on critical inputs imported from Russia or Belarus. Moreover, investment is set to benefit from the Recovery and Resilience Facility funds, the arrival of which has already started.

There seems to be no respite for the sky-high inflation rates in the Baltics. The key culprits remain 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 The EC inflation forecasts are already out-of-date. We expect these projections to be increased in the autumn forecasting round to reflect the already high year-to-date averages and expected outlook. Indeed, the January-August average inflation rate stands at 15% in Latvia, 17.4% in Lithuania and 18.4% in Estonia.

The ECB has jumped on the rate-hiking bandwagon in July and as inflation will not slow down for the time being, it should continue on the tightening path in the near future.
Since our last publication in July, there was a change in Estonia’s outlook from stable to negative by Fitch. The revision of the outlook mainly reflected a change in Estonia's fiscal stance which has been dented by exogenous shocks compared to its pre-pandemic trajectory (COVID, war in Ukraine, measures mitigating the energy-price squeeze). No other ratings or outlooks were altered. Apart from the one negative outlook on Estonia, Baltic countries hold stable outlooks from the three major rating agencies and remain comfortably in the investment grade.

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General information

AuthorErste Group Research
Product nameCEE Economies Special Report
Topic in focusFX, Macro/ Fixed income
Economy in focus-
Currency in focus-
Sector in focus-


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