Market overview: Subdued economic growth, yet positive signs emerge
Western economies demonstrated resilience this year, particularly supported by private consumption, although the growth of the services and industrial sectors has slowed significantly in recent months.
The Eurozone and the United Kingdom are expected to conclude the year in stagnation, the United States with modest growth and China is poised to exert the strongest influence on the global economy. However, direct investments in China are at their lowest on record going back to 1999, which will weaken its future growth.
Inflation is rapidly decreasing this year. The energy component has decreased from the worst in recent years from over 40% to -11% recently. The largest contribution to inflation so far is driven by higher service prices, with inflation exceeding pace in 2022. In the Baltic States, inflation has reached the overall level of the Eurozone, although it was highest in the region at its peak.
It is expected that the European Central Bank will no longer raise interest rates and the current rates will be maintained for some time to achieve the desired 2% inflation rate. Our bank’s economists predict that the ECB will not reduce interest rates until September of next year. Markets see EURIBOR remaining above 3% throughout the next decade.
Household purchasing power has significantly decreased due to high inflation, weak income growth, increasing living expenses and high interest rates. However, real wages have increased over the past eight years, supporting consumption, which has been stronger this year than expected.
The outlook for EUR/USD exchange rate is more balanced this year. The dollar has strengthened due to the growth of the U.S. economy, surpassing the Eurozone. According to our bank analysts, it is expected that the Federal Reserve will reduce interest rates in the United States by the end of next spring, causing the dollar to weaken compared the euro.
As forecasted, the recovery of the Baltic economies is expected next year. GDP is expected to grow only in Latvia (0.8%) this year, with projected zero growth for the Lithuanian economy and an expected contraction of -1.9% for Estonia. Next year growth is estimated to pick up markedly and the economy in Lithuania could grow by 2.4%, and in Latvia and Estonia by 2.5% each.