Russian sanctions hit hard but economy still growing

The sanctions war with Russia is having a marked impact on Latvia's economy, but there are also signs the economy is becoming more resilient and flexible as a result, a new assessment of the Baltic economies by Danske Bank said Friday. 

"The key factor inhibiting economic growth in the Baltic region has been external shocks (contraction in demand in Finland, Russia and the CIS, as well as increased geopolitical tensions). We expect growth in all three Baltic economies to pick up in 2016 and exceed the Central and Eastern Europe average," Danske said.

The Latvian economy will grow by 2.6% this year and 3.1% next year, Danske Bank estimated.

The current deflationary situation should not be a problem, provided it does not become permanent, Danske said: "As long as deflation is perceived as a temporary phenomenon, it encourages consumption and investment. Inflation is expected to pick up in all three Baltic states in the second half of 2015."

"Latvia has so far experienced the shallowest deflation among the Baltics, caused by the smallest fall in energy prices. Inflation in January was -0.3% but flattened out completely in February. We expect average inflation to be 0.8% in 2015." 

With regard to Russia, the Ukraine-prompted sanctions and counter-sanctions mean exports to Russia are "in freefall" with more to come: Danske expects Latvian exports to Russia to contract by a further 21% following a 4.9% fall in 2014.

Perhaps of more concern has been a serious drop in investment in Latvia, Danske said.

"Geopolitical uncertainty affected both consumption and investment growth... Following the escalation of geopolitical tensions in mid- 2014, investment growth turned negative in Q3.

However the report was also notable for Danske's claim that Estonia now boasts the highest wages in the whole Central and Eastern Europe region.

The average monthly gross salary in Estonia last year was €1,038 compared to €786 in Latvia and €715 in Lithuania.

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Economy
Economy