Coronavirus to hit Baltic countries’ economies hard

Coronavirus to hit Baltic countries’ economies hard
By Wojciech Kosc in Warsaw March 11, 2020

The outbreak of the coronavirus epidemic could shave up to 1pp off economic growth in the Baltic states, according to analysis from Swedbank.

Effects of the epidemic are still limited but “with a continued and broadened spread of the virus the economic consequences will be large,” Swedbank said.

In the optimistic scenario, the effects on the Baltic countries will be small, according to Swedbank. 

“GDP growth is projected to decline 0.2pp-0.3pp in 2020 compared with [Swedbank’s] January forecast, and then to recover already the following year. Since the decline is so small, it does not have any significant effects on employment and unemployment. However, some individual industries and companies may suffer worse than others,” the analysis claimed.

However, in the more likely scenario of severe disruption, the Baltic states will see their economic growth decline 1pp. That means growth in 2020 could be as low as 1.2% in Latvia, 1.4% in Estonia, and 1.6% in Lithuania.

Last year’s economic expansion came in at 2.2% in Latvia. Estonia grew 4.3% (4.4% following adjustment) while the Lithuanian GDP grew 3.9%.

The coronavirus-induced slowdown will possibly happen through three major channels, Swedbank said. 

“First and probably the most important – foreign trade flow disruptions. The effects of this is likely to be biggest on Estonia and Lithuania, as their share of total exports in GDP is larger,” it said.

Estonia seems to be more vulnerable through the import channel, as 7.3% of imported goods are originating in China and two-thirds of them are intermediate goods used as manufacturing inputs. 

Tourism, entertainment, accommodation and catering sectors are also likely to be negatively affected due to fewer incoming and domestic tourists. 

Although the number of tourists coming from China was relatively small, only around 1% of all incoming tourists, flows from other countries are also likely to ebb, as people will prefer to - or will be told to - stay at home. 

Estonia looks more vulnerable to suffer from weaker tourist traffic, as it is much more dependent on incoming tourists than the other two Baltic countries. 

Finally, domestic demand across Baltic countries is also likely to be weakened if negative effects from foreign trade and tourism start denting employment and wage growth. “Households, fearing the worst, are likely to increase their savings rates and postpone consumption of non-necessities,” Swedbank said.

Some positive side effects are possible in both short and medium term – manufacturers across the EU may be trying to substitute lagging goods from China with locally produced substitutes, creating opportunities for Baltic and Nordic countries, according to Swedbank.