OREANDA-NEWS. September 01, 2010.

Economic recovery of the region is gaining momentum
Strong growth in foreign demand have led to a significant pick up in momentum in the economies of the Baltic Rim, i.e. the Baltics, Poland and Russia. The bad news is that we now expect foreign demand to slow going into next year. The good news is that the labour market trends have turned to the better and are paving the way for a gradual improvement of domestic demand. We therefore expect between 3% and 5% growth in the five countries in 2011, reported the press-centre of Nordea.

The Russian economy has recovered in line with expectations, growing by 4.1% y/y in H1. We expect to see private consumption recovering clearly in H2 2010 due to positive signs on the labour market. However, over our forecast horizon we see growth slowing, as the initial boost from consumption and exports wanes. The government finances are currently strained due to the significant increase in permanent spending. Balancing the budget is a central challenge facing the government, with the development in oil prices a significant factor for the success.

The Polish economic outlook remains bright, but less so due to slower external demand, the new fiscal measures and a slower improvement in domestic demand so far this year compared to what we had expected. The labour market is improving, though. We expect growth between 3% and 4% in the coming years. Inflation is bottoming out and will be higher next year. This could pave the way for a first interest rate hike late this year.

Estonian GDP is returning to growth. The recovery has been export-led, and proper support from domestic demand is not expected until 2011, when labour market conditions ease. Reducing unemployment will be one of the main challenges in the near-term. We have revised upwards our growth forecast for 2010 and 2011 on recovering export demand and expectations of firming domestic demand, especially as Estonia adopts the euro in 2011.

The Latvian economy is stabilising at the bottom, with most of the improvement seen in foreign trade. Quarterly growth is expected to continue this year. In 2011-2012 improving domestic demand is seen supporting GDP to moderate growth. Government finances have stabilised in Latvia, which supports confidence and takes the pressure of the currency and the government. Interest is now turned to the finalisation of the 2011 budget, which is to take place after the Parliamentary elections in early October.

The Lithuanian economy is seen improving gradually, largely supported by export demand but with an increasing contribution from private consumption in 2011. We have revised upwards our growth forecast for 2010 based on strong export growth and the currently positive momentum in e.g. Russia. A challenge in the near-term will be reducing the large budget deficit, which postpones EMU membership to at least 2014.