News2019.08.30 13:01

Hard Brexit is bad, US-China trade wars are nasty, but Germany matters most for the Baltics

BNS, 2019.08.30 13:01

As China-US trade war escalates and Brexit uncertainty persists, the Baltic states’ economies are growing and an abrupt halt is unlikely, BNN reports. However, trouble overseas is not the biggest worry of Lithuanian businesses.

SEB and Swedbank keep drawing a rosy picture for the region for the remainder of the year and most of 2020. According to a new SEB Bank forecast, Lithuania’s GDP will grow at the fastest rate among Baltic states this year.

In Palanga, a Lithuanian resort town near the border with Latvia, new construction sites are popping up.

“The summer has been insane [...] in terms of new apartment and house sales. The supply can hardly meet the demand despite record-high real estate prices,” Regina Lingė, co-founder of Palanga NT (RE) brokerage firm, told BNN. “However, talks about a looming crisis is in the air.”

Germany sours Lithuanian mood

According to Sigitas Besagirskas, a prominent Lithuanian economist and president of Vilnius Industry and Business Association, says manufacturing in the country remains strong and isn’t likely to slow down soon.

However, he cautions that industrialists are getting increasingly wary – and weary – about the bleak prospects of German economy.

“Alas, it is underperforming for the eighth consecutive month, which is a bad omen. Everyone wants to see if it will rebound in the second half-year,” Besagirskas said. “Fallout from hard Brexit, or trade wars between the US and China [do not worry me] the most,” he added.

With 11.9 percent, Germany is the second export destination for Lithuania, after Poland.

“The Lithuanian economy is small, yet a lot of it is oriented towars Germany, so it is very likely that the German slowdown will make a negative impact on the export market,” said Besagirskas.

Lithuania’s exports to Germany have risen an impressive 30 percent over the last year, of which 70 percent is accounted for by logistics.

“A slower German economy can also negatively affect all foreign direct investment in Lithuania,” he added.

However, “an incessant inflow of EU funds is still available for Lithuania companies, although co-financing has become more common. So the inertia from the previous years of growth, coupled with the availability of funds, will keep the economy rolling forward.”

Long-term outlook looks gloomier

According to Gabrielius Makuška from the Lithuanian Confederation of Industrialists (LCI), Lithuanian businesses are still optimistic, but there are more signs of an approaching slowdown, and the long-term outlook for the country looks gloomier than a year ago.

“The recent Central Bank‘s survey shows that the share of companies forecasting export growth has decreased from 26 per cent to 20 per cent over the last half-year. Such gloomier expectations are particularly spread among small and medium-size companies,” said Maukška.

“Fewer businesses expect demand to grow, [down 6 percent] to 25 percent.”

Challenges to Lithuanian economy

The International Monetary Fund concluded in late June that Lithuania’s economy was stable and the country was prepared better than ever for any possible challenges. Borja Gracia, the head of the IMF mission in Lithuania, said then that Lithuania’s economic situation was viewed positively, but stressed that the country needed to improve its education system to adapt to demographic changes.

So far, Lithuania’s Central Bank has named two substantial risks for the country’s financial sector: the financial imbalances in the Nordic states, which affects Lithuanian banks, and stronger activity in Lithuania’s credit and real estate (RE) market that has the potential of creating ‘a bursting bubble’.

This story originally appeared at BNN, and was edited for brevity by LRT English

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