General

On August 6, the three Baltic economies showed signs of slowing and stagnation, facing the threat of a recession, but economists have yet to agree on the severity of the recession.

The central banks of both Lithuania and Estonia are predicting a prolonged, but not dramatic, slowdown in their respective economies. The two central banks also believe that the economic outlook faces great uncertainty due to the impact of the war in Ukraine.

Latvia’s gross domestic product (GDP) growth slowed to 2.6% year-on-year in the second quarter of 2022, compared with 6.7% in the first quarter; Lithuania’s second-quarter GDP grew by 2.8% year-on-year, but the growth rate was 0.4 points lower than in the first quarter percentage point.

Experts pointed out that the risk of economic recession in Latvia is very high, it can even be said to be inevitable.

Economists at Nordic Bank in Sweden pointed out that at least a long-term economic slowdown is inevitable, but its severity is difficult to predict because it will be determined by the depth of the future development of the energy crisis.

Some experts predict a recession is coming, but don't think it's necessarily a bad thing. GDP growth would slow sharply, turning into a mini-recession. At present, the Latvian economy is still a little overheated, and a small and short-term recession will be one way to push inflation down.

Other experts believe that in the second half of this year, the Latvian economy will experience a mild recession, and the inflation rate may peak in the next few months and will still be close to 20% by the end of this year. With experts predicting a relatively mild recession, there's no reason to predict a big rise in unemployment.

Inflation will have a huge impact on household spending, such as heating and electricity bills, which are also determined by world market prices, interruptions in gas supplies from Russia or the EU’s ban on Russian energy imports. The governments of the three Baltic countries are urgently developing response plans to offset at least some of the rise in heating and electricity bills.

Economists have warned that high public spending could further fuel inflation, making it difficult to mitigate the impact of rising prices on vulnerable households.

There are also experts who worry that Latvia's parliamentary elections will have a negative impact. Experts point out that the unrealistic promises made by some candidates in the electoral campaign are likely to weigh heavily on public spending, while Latvia's economy has been dragged down by the new crown epidemic, the war in Ukraine and high inflation and is in a rather abnormal period.