SEB reduced its forecast for Latvian gross domestic product (GDP) growth for this year from 2.5% to 1.5%, according to the bank’s latest economic review “Nordic Outlook”.
In addition, SEB reduced its forecast for Latvian GDP growth next year from 1.3% expected in August to 1.1%, which is still the fastest growing among the Baltic countries. On the other hand, in 2024, SEB still forecasts Latvia’s GDP growth of 3.5%.
SEB has not changed Latvia’s average annual inflation forecasts. The bank still forecasts that this year the average annual inflation in Latvia will be 16.5%, which is the slowest increase in consumer prices among the Baltic states, next year the average annual inflation will be 9 .9%, which is the fastest increase among the Baltic States, but in 2024 – in the amount of 2.1%.
At the same time, SEB raised the Lithuanian GDP growth forecast for this year from 1.5% to the previously expected 2.2%, while the Lithuanian GDP growth forecast for 2023 was reduced from 0 .5% to 0.1% and the GDP growth forecast for 2024 has been reduced from 3.7% to 3%.
The average annual inflation forecast for this year in Lithuania has been increased from 17.9% to 19%, predicting the fastest rise in consumer prices among the Baltic countries, the forecast for next year has been increased from 6 2% to 9%, while the forecast for 2024 has been increased from 1.6% to 2%.
Estonia’s GDP growth forecast for this year has been reduced from 1.2% to 0.6% expected in August, for next year it has been reduced from 0.5% to 0.3%, while in 2024 SEB still expects Estonia’s GDP to grow by 3.5%.
At the same time, the average annual inflation forecast in Estonia for this year was increased from 18.2% to 18.9%, while for the following year it was increased from 6% to 8.5% and for 2024 was reduced from 2.5% to 2%.
Dainis Gašpuitis, macroeconomic expert of “SEB banka”, told the LETA agency that in recent months most economies have shown unexpectedly high resistance to rising interest rates and inflation. Households continue to spend money on consumption patterns stalled during the Covid-19 pandemic, including through savings. Businesses benefited from easing global supply disruptions and still relatively healthy demand. This supports economic activity, which can shorten the period of rising unemployment. This reduces the risk of a deep recession caused by the possibility of a chain of multiple negative events.
According to SEB forecasts, GDP growth in developed economies (38 OECD countries) will reach 2.7% this year, but will slow down to 0.5% next year.
“As long as the significant problems related to inflation, energy supply and geopolitical upheavals continue, the situation will be difficult,” says Gašpuitis.
SEB analysts expect US GDP to decline in both the first and second quarters of next year. The job market is likely to weaken enough to herald a recession. Europe is also entering a recession and negative GDP growth is expected throughout 2023 in both the Eurozone and the UK. China’s recovery will lead to slightly faster growth in the emerging group. This will help level out world GDP growth, which will reach its lowest level in 2023 – 2.3%, or slightly above the 2%, which is used as a benchmark for the global recession. GDP growth over the period 2022 to 2024 will be relatively similar in the US and Europe. However, the differences in challenges have widened. This applies to energy supply, where conditions in the US have normalized, but the situation in Europe will remain dire for a long time.
Gašpuitis notes that the economies of the Baltic states, as well as the European Union (EU) as a whole, are moving towards recession, although indicators of change in GDP will remain slightly positive in 2023. The link to the Russian economy continues has rapidly weakened in recent years. This means that the biggest threat comes from high inflation rates, which have peaked at just over 20%. Inflation rates have reached this level because energy and food prices are growing much faster than in the euro area as a whole, even though they represent a larger share of total consumer spending. In such a context, annual wage growth of between 7% and 10% is not sufficient to prevent a decline in household purchasing power.
“Inflation will gradually decline. Because of this relative stability, the rise in unemployment will be contained. Construction is hampered by rising interest rates and falling demand, but industry needs to be supported by EU funds We expect the growth of the Baltic states to be slightly above zero in 2023,” the bank says.
SEB Bank also says that the expected downside risks are largely related to even higher energy prices or other economic consequences of the escalation of the war. For example, a complete disruption of Russian gas supplies this winter cannot be ruled out. This could trigger more austerity measures and lead to a much deeper recession. The outlook for the Russian economy is very uncertain, as it is difficult to assess what the actual impact of international sanctions will be. The Russian authorities have also stopped publishing some statistics, including data on external trade. Russia’s GDP is expected to shrink by around 4% this year and around 3% next year.
“Natural gas prices have declined by almost 80% since their peak in late August. By contrast, natural gas contract prices for 2023-2024 have declined by around 50%. futures are 4-6 times higher than usual. The same goes for electricity prices, as marginal natural gas prices are the benchmark price in most of the European energy market. It takes time to switch to a new energy system The short-term solution is more liquefied natural gas (LNG), coal and oil combined with reductions in energy use.The EU is likely to have to get used to gas and electricity prices, which are three to seven times higher than they were up until now,” the bank says.
The bank also says the oil market has been tight this fall. However, fears of a recession, hikes in key interest rates and the lockdown of China due to Covid-19 have put downward pressure on oil prices. Before winter, oil inventories are low and the diesel crisis is worse than in 2008. Therefore, a cold first quarter of 2023 can be very problematic. At the end of this year, new sanctions were set on the import of oil and petroleum products from Russia. Therefore, the price of “Brent” crude oil will rise to 115 US dollars a barrel in the first quarter and will continue to rise to 125 US dollars. Prices should decrease in the second half of the year.
The forecast of high oil prices is due to low investment in oil and gas production over the past decade, which has led to supply constraints in many places. Rising US shale oil production will also be difficult to achieve. Overall, there are many signs that the influence on oil prices will soon shift towards the OPEC cartel and prices above $100 a barrel could become the norm for a few more years.
