External environment in the Baltic States and Ukraine

Lithuania

At the end of 2018, the Lithuanian economy experienced a slowdown in its economic growth. GDP in the third quarter was 2.9% y/y, having declined on a q/q basis by 0.9%. Growing household incomes were a driver of the Lithuanian economy, having translated directly into higher internal demand and ongoing pressure on wage inflation.

To a slight extent, a higher immigration rate eased tensions on the labor market. The majority of immigrants have been hired by transportation companies, whereas a number of other industries continue to struggle with a shortage of personnel. This demonstrates an imbalance on the labor market, ultimately leading to a rapid increase in wages.

In 2018, inflation subsided to the annual rate of 1.9%. Changes in prices remained affected by the domestic economic situation and shifting trends in the global commodities market. This year’s changes in global commodity prices contributed significantly to higher prices of fuels, yet inflation was kept at a moderate level due to the prices of food, beverages, industrial goods and services, which grew at a slower pace than the year before.

Latvia

In the third quarter of 2018, Latvia’s GDP grew at a rate of 5.3% (annual data, seasonally adjusted). The rapid growth of the Latvian economy was driven by rising investments and private and public consumption.

In a situation of growing uncertainty in the external economic environment and export opportunities becoming more and more blurred, it is possible that private consumption will again become the economy’s driving force. Private consumption remained on a stable growth path and had a favorable impact on investments. Gross fixed capital formation, the growth rate of which subsided somewhat in the second quarter, increased 4.2% in the third quarter.

The Latvian labor market experiences decreasing unemployment and high demand for labor, meaning that wage growth remains solid. In the third quarter of 2018, gross wages increased 8.0% y/y in nominal terms.

In December 2018, the annual inflation rate was 2.6%, driven largely by higher prices of goods and services related to home maintenance, alcoholic beverages and tobacco products, transportation services and healthcare.

Estonia

Despite the slight cooling of the economic situation in Europe, Estonia maintained its upward trend. According to data published by the Bank of Estonia¹ the country’s GDP increased 4.2% in Q3 2018 (on a year-on-year basis), whereas the quarter-on-quarter increase was 0.4%. In the third quarter of the year, GDP driven chiefly by domestic demand, while exports recorded a slight increase. The construction and real estate sectors were responsible for approximately half the growth.

The Estonian labor market is struggling with a shortage of qualified employees, which predominantly affects those sectors of the economy that suffer from low productivity and find it hard to compete with sectors offering higher wages. The annual increase in average gross monthly wages was 6.4% in Q2 2018, and 7.5% in Q3 2018.

The consumer price index (CPI) moved up 3.4% in 2018² compared to the previous year. The largest impact on the annual change in the index was exerted by housing maintenance expenses, including prices of electricity supplied to homes, solid fuels and rents.

Ukraine

In 2018, the Ukrainian economy remained on a stable growth path initiated in 2017. In Q3 2018, Ukraine’s GDP increased 2.8% compared to the corresponding period of the previous year. In December 2018, the country’s annual inflation rate was 9.8%, the lowest in the last 5 years. The inflation rate was affected predominantly by the following main factors: an increase the discount rate by the National Bank of Ukraine reflecting the strengthening of the country’s domestic currency and wage increases, and the ensuing increase in consumer demand.

After 11 months of 2018, a negative balance of foreign trade in goods and services was recorded (USD -10.6 million). This was another offshoot of the still unresolved conflict in eastern Ukraine. The loss of control over the resources in the eastern part of the country curtailed Ukraine’s export capacity (due to disrupted mining production and electricity generation).

¹ Estonian Economy and Monetary Policy, 4/2018, Bank of Estonia.
² Data published by the Estonian Statistical Office.