2007-11-22

Baltic Rim Outlook: Increased purchasing power creates new opportunities for Nordic companies

Labour market improvements have substantially increased the average purchasing power of consumers in the Baltic Rim region and created new opportunities for Nordic companies. It is no longer just a question of the huge potential future demand. Consumer spending is indeed expanding rapidly and has become the primary growth engine in all the countries. This is one of the conclusions presented by Nordea's economists in their semi-annual publication Baltic Rim Outlook. The Baltic Rim consists of Russia, Poland, Latvia, Estonia and Lithuania.

Labour market developments in the Baltic Rim economies are spectacular. In many ways they resemble developments in the Nordic labour markets, only much more extreme. Thus, wages are growing by more than 30 per cent in Latvia, 6 million new jobs have been created in Russia since 2000 and the unemployment rate has fallen 7 percentage points in Poland since the EU accession in 2004.

– Among the Baltic countries Estonia leads the way in the correction to more sustainable growth rates. We are comfortable with our view that overheating risks are history even if inflation continues to rise before the trend reverses, says Mika Erkkilä, Senior Analyst, who is Nordea's expert on economic developments in the Baltic countries and Russia. Real estate prices are also reaching their turning point. In contrast, the growth rate in Latvia is still far too high for policymakers to feel comfortable. The red-hot pace in bank lending is slowing, but the very large current account deficit has only stabilised, at best. Although real estate prices have fallen since the spring, calling this trend a broad slowdown would be premature. Lithuania has not developed a serious overheating problem - at least not yet.

– Russia's fundamental cyclical position is strong and the country is in the midst of an investment boom, according to Mika Erkkilä. The value of Russian household consumption is already twice as high as in Poland and the rapidly growing purchasing power of the middle class opens up new opportunities for Nordic companies. Despite the upcoming election season, Nordea does not expect that economic stability will be jeopardised.

– The Polish economy experiences strong growth driven by favourable dynamics in domestic demand. Indeed, developments in the labour market continue to underpin strong increases in household incomes, and companies are investing heavily to be able to meet future demand, says Anders Svendsen, Nordea's Poland analyst. This suggests that growth is sustainable at a high level. Signs of overheating are emerging, but the risk remains limited.

Baltic Rim Outlook

Information about the company: Nordea Bank AB