16.03.2016.

Nordea Economic Outlook: 2008 crisis scenario will not repeat

  • Global economy trend: pause in globalization
  • Global economy trend: pause in income convergence
  • Global economy trend: politics
  • Baltic States economies
  • In search for new growth engines
  • Risk of labor market overheating
  • Baltic States are better than ever prepared for any negative shock

We believe that 2008 crisis scenario will not repeat in 2016 and the outcome will be more reminiscent to the one during the 1998-1999 crisis. The main reason is that USA economy is in a very good shape and China is doing everything it can to avoid outright recession or at least to win time and postpone the recession until 2017, 2018 or beyond. However, three major trends in global economy fuel fears that new global recession might be just around the corner: pause in globalization, pause in income convergence and politics.


Estonian economist Tõnu Palm

Global economy trend: pause in globalization

Pause in globalization is evidenced by falling global trade volumes: among developed, among developing and between developed and developing countries alike. This suggests that lower oil and commodity prices or stronger dollar alone cannot explain this phenomenon. Indeed, closer look reveals that global economy is suffering from overproduction (or under-consumption). The US consumers alone are driving global demand with USA recording record-high trade deficits with both China and the Eurozone in 2015. On the other hand, Chinese-Eurozone trade is in stagnation mode since 2012 (Sino-Japanese - in recession) with both countries engaging in “beggar-thy-neighbor” currency war. Which they should not be fighting at the first place, since both Eurozone and China do not need more exports – they need more consumption. China should transform itself from “global factory” to “global supermarket” while Eurozone should get rid of post-crisis German-style “produce more – consume-less” export-driven growth model. Otherwise, contrary to 1998-1999 crisis, two heavyweights Eurozone and Chinese producers may be too big to digest for US consumers.

Global economy trend: pause in income convergence

Income convergence between developing and developed economies slowed down to the lowest level in 15 years, which may have profound effects on global growth as well as trade and population migration patterns. For almost two decades it was taken as granted that less developed countries would grow faster than developed ones and eventually will catch up (converge) with the rich Western word. In the Baltics it was kind of a national sport to calculate how many years are left until we will live as good as Germans or Scandinavians (in China they still calculate that). However, post-crisis period saw the pace of convergence declining or in some cases even turning from convergence to divergence: for example, Swedish economy grew by 3.6% in 2015 – higher than Baltic countries, not talking about the recession-hit Russia or Brazil. If these tendencies will continue, the future of global economy may not be the one of convergence, but of divergence with economic might clustering in already rich economic centres. This pattern is particularly dangerous in regional economic unions, such as the European Union, since the absence of income convergence may question the very existence of the EU as such (the EU Cohesion Funds are provided to less developed regions under the assumption that they will eventually converge to the EU average levels).


Latvian expert in economics Gints Belēvičs

Global economy trend: politics


Political risks are posing by far the biggest danger to the European Union. United European Union economically would have been strong – perhaps even as strong as the USA. However, continued political uncertainty and self-inflicted fears about the Grexit, Brexit or the end of Schengen is preventing EU from utilizing its full economic potential.

Baltic States economies

Baltic economies weathered Russian economic crisis well and are looking forward for stronger growth in 2016. Domestic consumption is driving economic growth in all three Baltic States supported by robust wage growth, low inflation and falling unemployment. However, relying on domestic growth drivers for small open economies may be risky and not sustainable in the long-run. Especially given that accelerating wage growth, if not accompanied by productivity growth, may reduce external competitiveness of the Baltic region. However, given more uncertain external environment we have slightly reduced GDP growth forecasts for all three Baltic States for 2016.

In search for new growth engines

An ongoing EU-Russia economic war is depriving Baltic States of their status as a bridge between the East and the West, effectively making it a periphery of the EU. This makes it a priority to find a new growth engine to avoid becoming an economic backwater of Europe, especially given an increasing competition from more centrally-based and easier accessible CEE countries such as Czech Republic, Slovakia and Poland. Baltic countries were to a large extent successful in re-orientating their exports from East to West with Scandinavia overcoming Russia as the second-largest export destination (after the Eurozone) in 2015. However, with more expensive and scarce labour force and limited pool of natural resources, Baltic States have little competitive advantage in attracting investments into manufacturing industry (given an ongoing deflationary pressure in global goods market the timing is far from perfect either). Hence, much hope is pinned on growing exports of IT, financial and other business services. In this regard, Vilnius and Tallinn are establishing themselves as regional centers of shared services centres (SCC) with substantial investments envisioned in 2016 and 2017 – mainly from Scandinavian countries.


Nordea Chief Economist Baltics Žygimantas Mauricas

Risk of labor market overheating


Accelerating wage growth and still high unemployment sends a signal that the labour market might be overheating. These developments are most visible in Latvia, which has the highest unemployment and at the same time the fastest wage growth. This can be explained by high regional and sectoral structural unemployment. Unemployment rate in the Riga region (5.6%) is almost four times lower than in the remote Latgale region (19.1%) bordering Russia. Hence, in Riga there is a lack of employees, while in Latgale – lack of employment. Ideally, people from Latgale region should be moving to Riga in search for job opportunities, but in reality they often chose to emigrate from Latvia altogether, hence making the problem worse. Another reason is sectoral unemployment, caused by the sharp employment fall in the construction and manufacturing sectors during the post-crisis period. As a result, Latvia and Lithuania are now the only two EU countries with more female than male employees.

Baltic States are better than ever prepared for any negative shock

On a positive note, Baltic economies are better than ever prepared for any adverse shock. Estonia is especially well prepared with the lowest government debt to GDP level in the EU, government budget and current account surpluses and strong household balance sheets. The other Baltic economies are also following similar path with strong fiscal positions and minor or no external deficits. Thus, Baltic Economies have weathered well Eurozone sovereign debt and Russian crisis and should not be afraid if more is to come.


Additional information:
Edgars Žilde, Communication project manager, Nordea Latvia, tel.:6 700 5434, mob.:28 452 975, edgars.zilde@nordea.com