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.

Economic growth in the Baltics in 2019 was driven by strong domestic demand, recovery in agricultural sector after a very weak 2018, as well as export-oriented services. Manufacturing and goods exports are increasingly feeling a manufacturing recession in Europe, trade conflict between the US and China, and a decline in world trade. However, manufacturing performance has been better than one would expect given the weak external environment.

At the same time, economic sentiment in the Baltics is weakening, which is especially pronounced in Estonia, which more than the other Baltic countries is affected by the slowing growth in Finland and Sweden. The deterioration of sentiment is currently most pronounced in the industrial sector, although the economic sentiment in Lithuania remains one of the strongest in the euro area. Given the worsening business sentiment, GDP growth in the Baltics will slow down in 2020, but at this point there are no grounds for concern about significant crisis. Most of the economic indicators in the global economy are far from the levels where there is serious concern and the economies of the Baltic States are much more stable than they were 10 years ago - foreign trade is balanced, domestic lending is financed by domestic deposits and real estate prices compared to wages are significantly lower than before crisis.