Baltics – Estonia with the deepest recession

The economic landscape of the Baltic countries has been challenging this year. Estonia, in particular, is projected to undergo the most severe recession among EU countries in 2023. Moreover, Latvia and Lithuania are likely to experience economic stagnation or a mild recession. This economic slowdown can be attributed to several factors including a stringent monetary policy, unfavorable developments among trading partners, and a decrease in domestic demand due to high inflation. Despite these challenges, the economic outlook for the next two years is promising as most of these negative effects are expected to dissipate.

On a more positive note, inflation is approaching the end of its downward trajectory, with Latvia and Lithuania reporting figures close to the 2% target. The primary driver of inflation is the service sector, which experienced a delayed cost increase due to nominal wage hikes. Progress has been made in achieving the Sustainable Development Goals, with a majority of targets showing improvement in recent years. The Recovery and Resilience Facility allocations have been revised with the RePowerEU chapter. However, Lithuania is the only country that has significantly capitalized on this opportunity. All three countries have managed to maintain relatively low levels of debt. Nonetheless, there has been an increase in deficits in recent years, and fiscal consolidation may pose challenges. Despite a recent downgrade, Estonia's interest expenses are still expected to remain very favorable, which is also true for Latvia and Lithuania.    

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