In its regulr Nordic Outlook overview, SEB said: "After a lag, the three Baltic economies are now beginning to be affected by last year’s global slowdown. This includes lower industrial production and weaker demand for transport services.
"Despite slower growth, labour markets remain tight and pay increases are high. Lithuania’s GDP growth will slow from more than 3.5 per cent last year to around 2.5 per cent in both 2020 and 2021. In Latvia, a temporary slump to 2.0 per cent growth this year will be followed by a new acceleration to 2.5 per cent in 2021. Estonia will see a slowdown from last year’s 3.8 per cent growth to 2.0 per cent in 2020, then a rebound to 2.6 per cent in 2021."
On Latvia specifically, SEB said that while wide-ranging structural reforms in the financial and transit sectors sectors will restrict growth potential.
"Continuing structural changes in the financial and transit sectors will pull down growth this year as well. We are maintaining our cautious outlook, expecting GDP to rise by 2 per cent in 2020 and rebound to 2.5 per cent next year," SEB said.
The economy is slowing, but the situation is "far from critical" said SEB, predicting that wage growth will ease from 8.3 per cent in the third quarter of 2019 to around 6.5 per cent this year.
"Employers will increasingly focus on ways to offer alternatives (bonuses, flexible working hours, better work environment) to reduce fixed wage costs," SEB suggested, noting that unemployment is at its lowest level for 13 years.
The full report can be read online.
Also January 21, rival Swedish bank published its own overview of the economic situation which said coming quarters would be "characterized by economic weakness" with growth picking up in the second half of the year.
"Investment growth plummeted in 2019 and is projected to slow even more before picking up towards 2021. EU funds-related investment has reached its maximum and is no longer providing an additional boost to investment growth. Heightened uncertainty is holding back private investment; this is projected to pick up pace towards the end of the forecast horizon, with an improving international environment and, potentially, the start of some large-scale investment projects linked to Rail Baltica," said Swedbank.
"There are risks related to the financial sector," Swedbank added.
"The Financial Action Task Force is currently investigating whether sufficient progress in addressing shortfalls in Latvia’s anti-money-laundering and counter-terrorist-financing efforts has been made. The government has achieved good progress in implementing regulatory changes necessary to mitigate the risks. However, improving the efficiency of criminal investigations and prosecutions will take time. Finally, the government is aiming to produce a new tax reform this year. There is currently very little clarity as to the measures or even the objectives of this reform. This could result in hasty decisions made towards the end of the year and increased uncertainty, which will not bode well for the business environment."
