Swedbank Sees Deeper Baltic Slump, Risk of Deflation

Jan. 30 (Bloomberg) -- Lithuania, Latvia and Estonia, facing the worst economic slump since the end of Soviet rule in 1991, will suffer an even deeper economic contraction and risk deflation through next year, said Swedbank AB.

Latvia’s economy will probably contract 10 percent this year, Estonia’s gross domestic product may shrink 7 percent, and Lithuania’s economy will shrink 6 percent, said Swedbank, the top Baltic lender, in an updated Outlook today. Lithuania’s GDP may contract 3 percent next year, Latvia’s GDP may shrink 2 percent and Estonia’s GDP will expand 1 percent.

“Even the year 2010 will not bring positive growth, albeit the year-end growth rates may turn positive,” Maris Lauri, the chief macro analyst with Swedbank in Tallinn, said in the report. “Negative processes in the economy mean that prices of goods, services, labor and assets will continue to fall, and annual deflation is a very possible scenario in 2009-2010.”

The global credit freeze and faltering domestic demand pushed Latvia and Estonia into the European Union’s deepest recession, while Lithuania contracted for the first time in nine years in the fourth quarter. Swedbank’s forecasts are more pessimistic than those issued by the European Commission and Nordea AB, the biggest Nordic lender, earlier this month.

Prices Development

The bank forecast the average inflation rate will be zero this year in Latvia and forecast a deflation of 6.5 percent for next year. Estonian consumer prices will probably grow 1 percent this year and 1.2 percent in 2010. Lithuanian inflation may average 5 percent this year and 3 percent next year, Swedbank forecast.

Latvia last month agreed to a loan of 7.5 billion euros ($9.6 billion) from a group led by the International Monetary Fund. Falling tax revenue and reluctance to cut spending may force Estonia to follow Latvia’s example as soon as this autumn, former Prime Minister Mart Laar and Indrek Neivelt, the former chief executive of Swedbank’s Baltic operations, said earlier this month.

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