Eurozone's growth is improving; growth in Latvia will be determined by contradictory factors

24.05.2016 - 15:45

According to forecasts of SEB Nordic Outlook economic overview, global growth will continue to display symptoms of anaemia. Meanwhile, GDP growth in Eurozone could reach 1.7% this year and 1.8% in 2017. Perspectives of Latvia, Lithuania and Estonia are relatively good: growth in Baltics will be driven by private consumption and purchasing power of households will be strengthened by salary growth. However, wage increases are starting to affect competitiveness and inflation is expected to remain at very low levels.

"On one hand, we expect a boost in private consumption and increase of salaries in Latvia this year. On other hand, investments in business are still lagging behind and export levels are slipping. Most likely, this year we will witness the same scenario as last year: a weak first quarter followed by better performance in next quarters," says Dainis Gašpuitis, senior macroeconomist at SEB Latvia.

Latvia's GDP growth is expected to hit 2.7% this year and 3.5% in 2017. This year's growth in Lithuania and Estonia will reach 2.8% and 2%, and accelerate to 3.2% and 2.4% respectively next year.

SEB's economists have concluded that the global economy is facing a period of lengthy stagnation, marked by ultra-low interest rates and inflation levels. Particularly in Europe many economies are unable to sustain a positive growth on their own and require considerable assistance by governments and central banks. After decades of economic and financial deregulation we find ourselves in a situation where the market economy’s dependence on policy decisions is greater than ever.

Experts point out that Eurozone is a currency union with an imbalanced growth and considerable problems of political nature. "Unlike the pre-crisis years, currently we see that people and businesses are willing to save up instead of spending. Only a part of salary growth ends up in consumption, the rest is put aside," says Dainis Gašpuitis.

Meanwhile Germany is facing increasing criticism from the International Monetary Fund, US and other Eurozone countries about its financial surplus of EUR 290 billion (8% of Germany's GDP) and its over-cautious economic policy. Banking sector, especially in Southern Europe, is being weighed down by high debt levels of companies, bad debts and low interest rates. These factors are hindering growth. Rise of populism in Europe is increasing the tension - just like the probability of Brexit and the lingering Greek debt crisis.

GDP growth in 35 OECD countries this year is expected to reach 1.9%, which is slower than in 2015 (2.1%). In 2017 growth is expected to accelerate to 2.3%.

Policy of negative interest rates is taking a political dimension. In countries where interest-bearing savings accounts are more common, such as Germany, negative interest rates may be interpreted as a “hidden tax on savings”. Oil prices and stock markets have partly recovered from previous period's losses and central bank policies have either become more stimulating or postponed normalization of current policies. Brent crude oil prices are expected to rebound to USD 40-45 per barrel during next two years, thereby decreasing the risk of deflation.

Concerns about China's "hard landing" scenario have decreased and China continues to demonstrate impressive ability to stimulate its economy and rebalance the emphasis from exports to internal consumption. However, there still are considerable surpluses in production capacities and housing, and high levels of indebtedness. China's GDP will grow by 6.5% this year and 6.3% in 2017.

Meanwhile, Sweden's economic growth will slightly decelerate. Public consumption has reached the highest level in last 20 years: expenses related to refugees, housing construction and export growth will boost Sweden's GDP to 4% this year, while it is expected to drop to 2.8% next year.

Full version of SEB's Nordic Outlook is available here.