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A glimpse from Lithuania to all three Baltic States

The combined economy of the three Baltic States has not grown since the beginning of 2022. However, according to the changes in gross domestic product (GDP) the paths that the countries are following is different.

After a weak 2023, the Lithuanian and Latvian economies are forecast to recover, albeit not by much. But the biggest question mark remains for the Estonian economy. This is the opinion of Lithuanian economists, writes journalist Vakaris Deksnys.

Last year, Lithuania’s GDP contracted by 0.3% compared to 2022. Latvia’s economy fell by a more significant 0.6%. At the same time, Estonia’s GDP contracted by a very significant 3.5%.

Luminor, which operates in all three countries, forecasts that this year the Lithuanian economy will grow by 2%, Latvia by 1.2% and Estonia by 1%, taking into account the likelihood of tax increases.

According to Citadele Bank’s forecasts, the Lithuanian and Latvian economies could grow by 2% each, and the Estonian by up to 1% at best.

For decades, Estonia has been considered the leading country in the Baltic region, with the other two countries only trying to match its level. What has happened to the Estonian economy? (We asked Aleksandras Izgorodinas, economist at Citadele Bank.)

Estonia is still in recession, as all early indicators show. For example, Lithuania’s economic activity index has already rebounded and remains stable. Estonians are clearly lagging behind, with economic activity remaining at the same level as in the summer of 2020.

There are many reasons for this. First of all, Estonia’s debt-to-GDP ratio of individuals and companies is much higher than that of Lithuania or Latvia. When interest rates started to rise, everyone reacted very sensitively.

Estonia’s economy is also more dependent on the information technology sector. This is of course a good thing, as this sector has a positive effect on the whole economy. But at the same time, it is heavily dependent on access to cheap capital, which is currently not available.

The third reason is Estonian dependence on the Scandinavian countries and Finland. The local economies are also looking weak, with the real estate and construction sectors in particular stagnating.

Citadele expects growth in Lithuania and Latvia. Does this mean that the worst is behind us?

We must hope so. But there are many risks. In Lithuania, for example, service sector expectations in February were the worst in 43 months – since July 2020. I think this is due to the situation in the transport sector.

In Europe, transport rates have fallen, while companies’ costs have stayed the same, if not risen slightly. As a result, transport and logistics companies have been caught in a price scissors: costs remaining the same as before, but revenues falling.

Overall, 2024 will be a year of challenges and opportunities for both Lithuania and Latvia. Their economies are like compressed springs that could go off at any moment.

This depends on a couple of important factors. First of all, the euro area economy seems to have bottomed out and is starting to pick up. For countries in our region, this means more orders.

Second, in both countries, wages are rising faster than prices, which in turn boosts domestic consumption.

Maybe Estonia’s economy will recover too?

Early indications are that the Estonian economy has only just bottomed out. However, we can only expect a significant recovery in the second half of this year if the European Central Bank cuts base interest rates.

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Vidmantas Janulevičius, President of the Lithuanian Confederation of Industrialists

“Lithuania’s economy is being saved from a more severe downturn by the fact that it has a much higher share of industry than the other Baltic countries. In Estonia and Latvia, industry accounts for 12–14% of the economy, compared to 20.7% in Lithuania.

Our industry is struggling to survive and we are struggling to keep our customers, but even with the fall in exports last year, the good results for 2022 have resulted in positive export growth over the last two years.

In Estonia, the situation is different, as the country has focused a lot on service exports and has a much lower share of industry. Consequently, there is no proper diversification. We have a multi-layered approach to both services and manufacturing, which allows us to be more competitive.

Estonia’s recovery will largely be determined by how quickly the economies of Sweden and Finland, with which the Estonian economy has strong links, recover.”

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Inflation differs

Inflation in Lithuania and Latvia has declined significantly, falling below the euro area average of around 1% at the start of the year, according to Luminor. In Estonia, inflation rose to 4.2%.

This is due to the increase in value added tax from 20% to 22%, as well as other tax and administrative decisions.

Inflation in Lithuania and Latvia is expected to be below the euro area average this year.

However, Lithuania could repeat the Estonian scenario in 2025, as the expected tax increase could push inflation up to 3%.

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