Markets overview: economic contraction predicted in Lithuania and Estonia, growth in Latvia

Our bank’s economists predict that Lithuania's economy will contract by 1.5% this year. It is expected to recover and grow by 2.5% next year. The annual inflation for this year is projected to reach 9%, reducing to 3% the following year.

“Lithuania's economy is supported by improving household purchasing power due to rapidly increasing wages and decreasing inflation. Additionally, state investments financed through the European Union package strengthen the economy. However, this does not outweigh weakened export markets and declining industrial production, leading economists to forecast an overall economic contraction this year,“ says Joona Widgrén, economist at OP Financial Group.

Latvia is the only Baltic country where the bank's economists expect a 1% growth in gross domestic product (GDP) this year. The Latvian economy is projected to grow by 3% next year. Last year, Latvia's economy grew by 2.8%, while in the second quarter of this year, it remained in stagnation.

In the second quarter of this year, Estonia's GDP contracted by 2.9%, with the decline primarily attributed to a downturn in the energy, forestry, and real estate sectors. It is forecasted that Estonia will end this year with a 1% GDP contraction, and the country's economy will grow by 2.5% in 2024.

Inflation slowdown continues in the Baltic countries. According to calculations by economists at OP Corporate Bank, by the end of 2023, the inflation rate in Lithuania and Estonia is expected to reach 9%, while in Latvia, it's projected to be 8.5%. In August, inflation in Lithuania reached 6.2%, mainly influenced by rising prices of food, cars and pharmaceutical products, while falling energy prices mitigated inflation.

According to Widgrén, Baltic countries are still experiencing an economic slowdown, for example, Estonia's economy has been contracting for six consecutive quarters. All countries' economies are burdened by falling exports and reduced retail trade volumes. However, inflation is decreasing rapidly, and purchasing power is recovering due to rising wages in all countries, although this recovery might be slightly slower in Estonia.

Despite the challenges faced by all Baltic countries, the labour market remains relatively strong everywhere. In the second quarter of 2023, the unemployment rate in Estonia was 6.7%. Lithuania has the highest unemployment rate among all Baltic countries, while in Latvia, after a sharp decline in the first quarter of the year, the unemployment rate stabilized and is at a similar level to Estonia. Salaries continue to rise in all countries, and their growth is faster than inflation.