A senior Estonian finance official has questioned the growing consensus in capital markets that the Baltic states face an economic hard landing.
“It is way too soon to make strong statements about the economy,” Andrus Saalik, head of the finance ministry’s economic analysis department, said.
“The external outlook actually still looks good. We will only incur a significant impact if things change significantly in Europe. Our exports are still strong – apart from the electronic industry.
“We have had too high growth in the past and it had to come down. But the macro-fundamentals are still sound and unemployment is low. It is just domestic consumption that is a problem.”
Consumers had been “over optimistic about their future incomes” and were spending “way too fast”, Saalik said. This meant that “in some ways we wanted some moderation in growth figures so our economy could adjust and the current account would diminish.
“My biggest concern is that domestic consumers are going to over-react to negative factors just as they over-reacted to the positive side.”
His comments came as finance minister Ivari Padar called Friday for Estonia to find “new income sources” to boost falling budget revenues.
Marion Muehlberger, emerging market economist at Deutsche Bank in Frankfurt, said that while the growth figures for all three countries are clearly disappointing – especially Estonia’s quarter-on-quarter basis GDP, which contracted by 1.9% in the first three months of this year – it would be wrong to read too much into a single set of figures.
“One quarter’s worth of data doesn’t make a recession. The downside risks may have changed for the worse, but our baseline scenario of a soft landing in the Baltics is still pretty much in place.”
The bearish view was put by Lars Christensen, of Danske Bank, Denmark, who told Emerging Markets: “The risks of a hard landing and big economic dislocation are severe.
“Estonia is most affec-ted and domestic consumption is set for a further sharp drop. People in the Baltics have been consuming too much and now they are dangerously exposed.”
Certainly, the latest economic data indicate that the Baltic boom is over. Latvia’s year-on-year inflation rate, already the highest in the EU, rose to 17.5% in April, up from 16.8% in March, according to Latvijas Statistika. The key drivers were electricity prices, which grew 39.2% year-on-year and food prices, which rose 20.8% from April 2007.
Inflation figures for Estonia and Lithuania were both firmly in double-digit territory at around 12%. Growth figures also make for relatively grim reading. Estonia’s GDP advanced just 0.4% year-on-year in April. Latvia and Lithuania, much stronger at 3.6% and 6.4% respectively, were both sharply down on last year.
The slowdown is easing concerns over the growing trade imbalances in the Baltics which are among the highest in the emerging markets universe and which prompted Fitch rating agency to slash outlooks on its credit ratings for the Baltics from stable to negative earlier this year.
Estonia’s current account deficit, for example, has shrunk from over 23% a year ago to a much more manageable 13% as a cutback in consumer spending has cut imports, while exporters are benefiting from stronger-than-expected economic growth in the Eurozone.
In terms of the microeconomic environment there have been surprisingly positive results from corporates in cyclical industries that are ostensibly most exposed to a slowdown.
Estonian builder Eesti Ehitus and electrical engineering firm Harju Elekter both delivered better-than-expected profits last week. Meanwhile, Lithuanian ceramic tile maker Dvarcioniu Keramika reported its best profits for the last 18 months despite its exposure to the region’s fast-cooling construction market and was rewarded with a 37.8% rise in its share price as a result.