Inflation is heading down and getting closer to levels in line with inflation targets. Central banks’ policy rates are at peak levels, and the higher-for-longer mantra will soon be replaced with monetary easing. Nevertheless, monetary policy will remain restrictive in the near term and the full effect of the higher interest rates and tighter financial conditions still lies ahead. Hence, the global economy is slowing under the pressure of contractionary economic policy and the direction ahead of us in the near term will be similar for many countries: low or stagnating economic growth.
The Baltic economies are no exception. Latvia and Lithuania are expected to stagnate this year, while Estonia is projected to contract by 2.5%. A more notable pick-up is anticipated only towards the second half of 2024. With wages still rising and purchasing power recovering, domestic demand is set to rebound. Despite this, due to sluggish recovery in foreign demand, we are revising down our 2024 and 2025 forecasts for GDP growth in all three Baltic states.
