Capital Economics Raises Economic Growth Outlook for Three Baltic States

The economies of Estonia, Latvia and Lithuania are recovering from the European Union’s deepest recessions faster than previously estimated as manufacturing picks up and the financial industry improves, Capital Economics said.

Estonian gross domestic product will probably rise 3 percent this year, compared with a previous estimate for a 1 percent contraction, London-based Capita said in an e-mailed note today. Lithuania’s economy will register zero growth, compared with a 2 percent contraction forecast earlier, whileLatvian GDP will fall 0.5 percent rather than 3.5 percent.

The Baltic economies returned to growth in the second quarter from the previous three months, beating economists’ estimates. Exports and industrial output expanded as global trade improved and wage cuts helped increase competitiveness.

“We clearly underestimated the pace of the recovery, particularly in industry,” said David Oxley, an emerging markets economist at Capital, in the note. “Despite raising our GDP growth forecasts for the Baltic States, we remain a lot less optimistic than the consensus about growth prospects in 2011/12.”

Next year, all three Baltic states will expand 3 percent, Capital said.

Estonia, which will adopt the euro in January, expanded an annual 3.5 percent in the second quarter, the second-fastest pace in the EU behind Sweden. Lithuanian output grew 1.1 percent from a year earlier in the April-June period and Latvia’s annual decline slowed to 3 percent from 6 percent.

Latvian economic output grew a quarterly 0.1 percent in the second quarter from the previous three months. Oxley estimates quarterly growth was closer to 2 percent and will be revised up later.

The EU and the International Monetary Fund estimate Latvia’s economy will contract 3.5 percent this year, which will mean the country will have to implement fewer austerity measures in the 2011 budget.

To contact the reporters on this story: Milda Seputyte in Vilnius at mseputyte@bloomberg.net Aaron Eglitis in Riga at aeglitis@bloomberg.net

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