Baltic tigers face fears of economic jungle (News Feature)

By Aleks Tapinsh Sep 8, 2008, 11:33 GMT

Riga - Three tiny post-communist countries earned the nickname Baltic Tigers with years of spectacular economic growth that made them the envy of the European Union's old economies.

But Monday brought new evidence that Estonia and Latvia risk recession amid a worldwide credit crunch and plummeting domestic demand, while Lithuania also faces economic woes.

Estonia's gross domestic product (GDP) shrank 1.1 per cent year-on-year in the second quarter of 2008, down from growth of 0.2 per cent in the previous quarter, Statistics Estonia said in revised figures.

Latvia's economy grew by 0.1 per cent in the second quarter, down from 3.6 per cent in the previous three-month period, the office of statistics said in second estimates on Monday.

Once part of the fastest-growing economy in the European Union, Latvians now face a gruelling winter of rising heating costs and a shrinking labour market.

'This will be the year when each Latvian resident will suffer from the economic crisis and there will not be the privileged ones who will suffer less,' Latvian President Valdis Zatlers told LNT TV Monday morning.

Major employers say Latvians are now less likely to demand higher wages, and less frequently change jobs in the volatile economy.

'People more seriously evaluate why they want to change a job and whether this is the right time to do it,' human resources manager at Latvia's largest bank Hansabanka Kristine Sneidere told a daily newspaper recently.

That is likely to dampen Latvia's high annual inflation which ran at 15.7 per cent in August, compared to 17.7 per cent in May, according to the statistics bureau.

The central bank of Latvia has forecast growth this year will be between 2.5 and 3 per cent, though commercial bank forecasts are lower.

SEB bank sees growth this year at zero to 0.5 per cent, while Nordea expects an economic contraction of 0.4 per cent this year and 0.7 per cent next year.

Not everything is doom and gloom for the Baltics. Latvia's current account deficit, once the largest in the European Union, has been shrinking.

'The government has been forced to question the effectiveness of the budgetary spending, to revise the employment figures in the public sector and to listen to the advice from the business community,' SEB economist Andris Vilks said in a research note.

A slowing economy and dwindling revenues are confronting Baltic governments with tough choices when they present their budgets to their parliaments later this month.

The Latvian government last week decided to freeze wages for state employees, putting it under pressure from unions. Unions of police employees and doctors are planning to stage one-day warning strikes this month.

International investors pulled their funds out of the Baltic market about one year ago, said Kestutis Celiesius, head of the brokerage unit for Danske Bank in Lithuania. As a result all major Baltic stock exchange indexes have lost 30-40 per cent in a year, he said.