Swedbank: coronavirus could hold back Baltic GDP growth by 1%

Swedbank, the largest bank in the Baltic states, released a report March 6 giving an assessment of the potential economic effects of the spread of coronavirus in the region.

"The uncertainty regarding the economic development ahead is exceptionally high. Just up until recently, the consensus view among economist on corona’s economic consequences was that of a V-scenario, i.e. a marked but temporary downturn. This now appears increasingly as a pious hope. More likely now is a U-scenario, which would mean that the decline phase will be more extended but temporary. However, it cannot be ruled out that the virus could have lasting negative effects, for example by leading to permanently reduced international trade," Swedbank said. 

The OECD's main scenario means that global GDP will be 0.5 percent lower this year as a result of the coronavirus.However an alternative scenario described as "more severe but also more likely", estimates that global GDP growth in 2020 will be halved, from about 3.0 percent to 1.5 percent. 

As far as the Baltic states are concerned, Swedbank sees the "optimistic" scenario resulting in GDP 0.3% below its current predictions (2.2% growth for Latvia in 2020, 2.4% in Estonia and 2.6% in Lithuania), while the "more likely" scenario is a 1% reduction in that figure.

"In the optimistic scenario, the effects on the Nordic and Baltic countries will be small. GDP growth is projected to decline by 0.2–0.3 percentage points in 2020 compared with the January forecast, and then to recover already the following year. Since the decline is so small, it does not have any significant effects on employment and unemployment. However, some individual industries and companies may suffer worse than others. In this scenario, the economic-political response from the countries is lacking, that is, both monetary and fiscal policy are left largely unchanged in the Nordic and Baltic countries," Swedbank said.

"In the severe scenario, which means that global GDP growth will be halved by 2020, the effects on the Nordic and Baltic economies, on the other hand, will be noticeable. In this scenario, GDP growth will be between 0.4-0.8 percentage points lower. The somewhat greater effect in Sweden and Norway, than in Denmark and Finland, is explained by a stronger slowdown in exports in these countries. As the effect on growth is relatively large, the labour markets will also be affected to a greater extent with some delay."

The Baltic countries are likely to be negatively affected by the ongoing spread of the coronavirus through three major channels, the report says: via foreign trade flow disruptions, a fall in tourist numbers; and domestic demand across Baltic countries is likely to be weakened if negative effects from foreign trade and tourism start denting employment and wage growth.

Even in this scenario there is a potential silver lining, though: "Some positive side effects are possible in both short and medium term – manufacturers across the EU may be trying to substitute lagging goods from China with locally produced substitutes, creating opportunities for Baltic and Nordic countries," Swedbank said.

The full report is availabe to read online.

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