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Danske Bank forecasts recession this year for Latvia, Estonia

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According to Danske Bank, the Latvian and Estonian economies will slip into recession this year as industrial output falls and consumer demand weakens, Bloomberg writes.

Latvian gross domestic product will shrink 0.5 percent this year before resuming growth of 0.1 percent in 2009, Danske Bank said in a report titled "North Eastern Recap" today. Estonia has a high probability of negative growth for all of 2008, the bank said.

Accelerating inflation and falling property prices curbed consumer-driven growth and raised the risk of recession in the three former Soviet republics that border the Baltic sea near Sweden and Finland and which enjoyed the European Union's fastest growth in 2006. The expansion started to falter in the fourth quarter of 2007 in Estonia and Latvia, cutting investment and curbing domestic demand.

"We don't see any recovery until 2012-13, when the annual growth rate should return to the trend level of 3 percent to 4 percent in Latvia," the report said.

Estonia's industrial production fell an annual 4.7 percent in June, the fourth consecutive decline, the Tallinn-based statistics office said today, adding to signs the Baltic economy faces a contraction.

The third Baltic economy of Lithuania is likely to grow 4.4 percent this year and 2.6 percent in 2009, Danske said. The Lithuanian economy grew 5.5 percent in the second quarter.

"A major challenge for the Lithuanian economy will be an energy price shock in 2010 with the planned closure of a Soviet- built nuclear power plant, which will signal the end of the era of relatively cheap energy," the bank said. "This will hamper the energy-intensive economy and the adjustment period could be difficult."

The nation pledged to shut the Soviet-era Ignalina plant next year as a condition for entry to the EU. The government is seeking EU approval to delay the closure until at least 2012 to prevent energy prices from doubling.

Estonia's annual growth rate slowed to 0.1 percent in the first quarter, compared with 7.1 percent for last year, while Latvia's GDP grew 3.3 percent in the first three months of 2008 from the same period last year, compared with a 10.3 percent rate in 2007.

Danske bank forecasts Lithuania's inflation rate will average 11.4 percent in 2008, while Latvia's consumer price-growth may pick up to 17.3 percent this year before dropping to 12 percent in 2009.

The Latvian government is likely to fail to achieve its goal of having a budget surplus accounting for 1 percent of GDP this year, Danske said.

Sandra TaimreBalticBusinessNews