Global economy remains in a relatively moderate cyclical slowdown, but concerns about a recession in the US and Europe have not yet materialized, and short-term macroeconomic indicators are increasingly showing signs of stabilization. Manufacturing sentiment in the US, euro area, China and other major economies is no longer declining, new industrial orders have stabilized, suggesting more positive dynamics in world trade in the first half of 2020, and OECD leading economic indicators index has begun improving for the first time since 2018.
The Baltics continue to grow, but sentiment is declining
The Baltic region continues to grow faster than the euro area as a whole, despite declining world trade and slowing global economy. In Lithuania and Estonia, GDP grew by 3.9-4.3% year-on-year in the first three quarters of 2019, while growth in Latvia declined to 2.5%. This is mainly due to internal factors and some one-off negative shocks, such as adverse weather conditions in energy sector, a fall in timber prices, a drop in transit freight volumes, a tightening in fiscal policy and a reduction in cross border alcohol trade as a result of reduction of the Estonian excise duty. Some of these factors will continue to affect Latvia's economic growth in 2020, so growth in Latvia is likely to continue to lag behind Lithuania and Estonia.
Exporters are feeling the weakening of external demand
The unfavourable global macroeconomic environment is currently most felt in manufacturing and exports of goods, but industrial growth in the Baltics in 2019 has been significantly faster than elsewhere in the euro area, indicating that the Baltic producers remain competitive. However, this resilience of the industry to the decline in external demand is unlikely to continue in 2020.
Domestic consumption continues to support economic growth
Domestic consumption remains one of the main drivers of economic growth in the Baltics. However, in the final months of the year, annual retail sales growth in euro terms has slowed slightly from 6-8% in the first half of 2019 to 4-5% in the last months of the year. Growth rates have declined most rapidly in Latvia, partly due to the decline in alcohol sales following the reduction of excise duty rates in Estonia. At the same time, consumer sentiment remains very strong, unemployment in the Baltics is declining and average wages in the Baltics have risen by about 8% in 2019. Consumer price inflation is also moderate within the range of 2-3%.