2021 was a good year for the Baltic economies – GDP grew rapidly, domestic demand recovered, and the labour market followed. Economic temperature ticked up in all three Baltic states and is already approaching the long-run average.
Heat is building up gradually, as employment grows, excess trade surpluses shrink, and real estate prices shoot up. The key driver of the Economy Heat Index (EHI) was in the past quarters obviously inflation. Rapid price growth is usually a signal of excessive demand and overheating economies. However, a lot of the current inflation originates in the global markets and does not reflect domestic issues.
There are a few pockets of the economy that require attention. Housing markets in the capital cities are getting rather hot, labour shortages in some sectors could become an obstacle to growth. The ongoing energy crisis reminds us yet again that investments in energy independence and renewable energy development are a necessity.
The Baltics are in a good spot – there are plenty of jobs, incomes and investments are rising. There are enormous economic and social benefits of keeping the economies on the warm side – strong demand could induce investments and promote productivity growth that would improve longer term growth prospects.
