THERE is no lack of variety in current opinions on the global economic downturn. Even the use of a word like ‘downturn’ is questionable - oil companies and commodities producers are enjoying boomtime while everyone else is talking doomtime.

I won’t even bother adding my own totally inexpert opinion on what may or may not happen. Things will get better and worse, not necessarily in that order.

However, I am starting to notice that the gap between what others are saying about the Baltic states and what the Baltic states are saying about themselves seems to be getting wider. With ‘outsiders’ from the various banks and supra-national financial institutions are getting more and more bearish about the Baltic, it sometimes seems to provoke an ultra-defensive bullishness among the locals.

Typical of the downturn in sentiment abroad is Danske Bank. True, it does have a little form in liking to ‘call’ meltdowns, but it’s also one of the better communicators on the subject.

In its latest briefing document, Danske takes the pulse of the Baltic economies, and having done so calls for an ambulance with instructions to make for the nearest intensive care ward.

ON ESTONIA:

We expect growth to remain very subdued well into 2009 as such an unbalanced economy should face a number of years of sub-trend growth to reduce these excesses.

The property market bubble in Estonia has burst and over the last couple of quarters, property prices have come down sharply, but there is reason to believe the property prices could continue to fall for some time to come.

ON LITHUANIA:

The largest challenge for the Lithuanian economy will be the expected energy price shock in 2010, when due to 2-3 times higher electricity prices, GDP growth could drop by as much as three percentage points.

The intention to introduce the euro in 2010 seems to be highly unrealistic - especially taking the expected doubling of electricity prices in 2010 into account, which would add at least 3 percentage points to consumer prices.

AND (GULP) ON LATVIA:

The scenario of a massive slowdown in the Latvian economy looks more and more likely. Export-oriented sectors have performed badly recently and little improvement

GDP growth is likely to be negative in 2008 and 2009. Further, greater imbalances in Latvia will make the economic adjustment process more painful than in other Baltic nations, and growth may not resume until 2012-2013.

The Latvian central bank has been defending the peg by actively intervening in the FX market. The situation remains very critical.

And yet the very person doing the defending, central bank governor Ilmars Rimsevics, remains as sanguine as ever. He’s typical of a lot of local commentators and economists who tend to take personally any criticism of the national economy. In his June statement Rimsevics said:

So far, the global economic slowdown has not had a subduing effect on the demand for Latvia’s exports. This suggests that even in the presence of higher price effects exports succeed in taking the lead as the main driving force of economic advance. Likewise, the pace of growth in exports is substantially (by 15.0 percentage points) outstripping that in imports. This, in turn, is an underpinning factor of further gradual improvement in the current account deficit.

Export sustainability should remain a focal concern on the backdrop of awareness that external demand may weaken in the future, while costs continue to rise. In view of all this, a consistent implementation of government’s export promoting measures aimed at boosting international competitiveness of Latvia’s exporting sectors is needed. Corporate costs (wages and salaries, energy resources) have recently posted a solid pickup, with a gradual spill-over effect on profit margins that narrowed, including also manufacturing, the key export sector. Redistribution of investment from non-tradable sector (construction, retail trade, real estate) to tradable sector, i.e. for further enhancement of exports, will be decisive, to a large extent, in minimising the effects of economic overheating and resuming a sustainable pace of balanced growth.

Rimsevics’ consistent argument is that the Baltics represent a new economic paradigm, and so the same rules don’t apply as they might in Western Europe. It was a bold argument when he first made it, but he doesn’t seem to be wheeling it out quite as often these days. Maybe his theory used to be true, but the credit crunch has managed to lump everyone back together into one over-arching paradigm so that now no-one east or west is particularly confident about planning for the future.
And at the same time, Danske itself is engaged in a big rebranding and relaunch campaign in the Baltic as a result of its takeover of Sampo Bank. You don’t tend to do such a thing if you expect the economy to go down the tubes imminently…

This entry was posted on Friday, July 4th, 2008 at 6:00 pm and is filed under Miscellaneous. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.