The economic situation has changed radically


The rapid outbreak of COVID-19 virus in recent weeks has radically changed the economic situation in the Baltics and the world, which will be felt by almost everyone in the weeks and months. In the short term, social distancing measures to limit the spread of the virus have effectively stopped the aviation, hotel, catering and entertainment sectors, but almost all sectors of the economy are affected to a greater or lesser extent.

These events over the past few weeks have led to large revision of economic growth forecasts both in the Baltics and elsewhere in the world and the global economy is likely to be in recession this year. Short-term economic indicators in China and other affected countries show that economic activity in the aviation and tourism sectors has virtually stopped, while production and supply chains have experienced major disruptions, resulting in rising unemployment and declining demand in the economy. It is hard known for how long these shocks will continue, but they are reversible, although in China, where the number of new COVID-19 cases has fallen significantly, the return to previous levels of economic activity is only gradual. All this suggests that this shock to the global economy is comparable and possibly even greater than during the global financial crisis of 2008-2009.

These factors have also led us to revise the economic growth forecasts for the Baltic States for 2020, and instead of the previously expected 2-3% growth, we are currently expecting an economic decline of around 2% if the economic situation returns to normal in the next 3-6 months. However, if the return to previous levels takes longer, the Baltic economies could shrink by about 8% this year.

At the same time, it is clear that the situation today is significantly different than it was 12 years ago. For example, after the SARS epidemic or the Japanese earthquake in 2011, economic recovery took place at a very fast pace. In addition, the Baltic States and Latvia are now much more stable internally than in 2008. Lending is done with domestic resources, foreign trade is balanced, and real estate prices are relative to income at a reasonable level. However, decisive action by national and central banks to stabilize the economy will certainly be the most important factor in overcoming this crisis. In this respect, significant support measures have already been announced by the European Central Bank in the form of interest rate cuts and the launch of a 750 billion-euro financial asset purchase program, and economic support is also being prepared in the Baltic States. These programs range from 1 billion in Latvia to 5 billion in Lithuania, and include credit guarantees, tax deferral and support for workers affected by the crisis. The successful implementation of these programs is a very important precondition for overcoming this crisis.

Economic support measures in the Baltics