Record-strong growth spills over into overheating and devaluation fears reports Nordea, one of the biggest banks in Northern Europe.
Baltic Rim Outlook: Record-strong growth spills over into overheating and devaluation fears
Estonia, Latvia, Lithuania, Poland and Russia are among the fastest growing economies in the world. The Baltic economies are currently expanding even faster than during the previous boom year 1997. The expansion has been strong to the point of overheating and devaluation fears in Latvia. While we remain positive on the authorities' ability to control the situation, the risk is that the current very fast expansion will end in a hard landing. The real estate market is one important factor behind the expansion.
Despite the strong advances in recent years, the potential is far from exhausted yet. "We believe that the Baltic countries and Poland will continue growing faster than the EU on average in the coming years as well. Above-average growth in the Baltic Rim is also supported by the bright prospects in Russia, which has benefited a lot from the booming oil and gas prices," says Senior Analyst Mika Erkkilä, Nordea's economist responsible for the Baltic countries and Russia.
Overheating risks in Latvia have increased as economic imbalances have aggravated. Double-digit growth has come at the expense of stubbornly high inflation, a very high current account deficit and growing indebtedness. Inflation has increased to the extent that the country has seen its EMU plans delayed. "There have been fears about a possible devaluation. Despite the risks, we think that ultimately the authorities will manage to steer the economy into calmer waters and avoid a hard landing of the Latvian economy," Mika Erkkilä points out.
