The Baltic economies are operating above their potential- No overheating, but economic temperature is rising gradually
- Monitoring, fiscal prudence, and productivity-boosting reforms are necessary
The Baltic economies are now fully recovered from the past recession, and the output gaps have been fully closed in all three countries. However, the economies are continuing to expand at above-potential rates. Moreover, economic confidence is close to all-time highs, unemployment is the lowest in a decade, and wages are growing at an accelerated pace. Thus, one cannot avoid asking, Are the Baltic economies on a sustainable path or could they be heading towards an overheating? To help us answer this question, we constructed an economy heat index. It shows that, although the Baltic economies are not in the overheating mode yet, the temperature is slowly rising. This is largely driven by a tight labour market, but it has not yet translated into high inflation and a buildup of imbalances elsewhere. Nevertheless, the situation requires close and continuous monitoring, and some actions may be needed. Productivity-boosting reforms and a looser immigration policy could put the economies on a more sustainable track.
