While Estonia’s economy shrank by 2.1% YoY in the first quarter, Lithuania’s economy grew by 2.9%, according to the flash estimate. The growth was driven by both general confidence and government investment, Tonu Mertsina, chief economist at Swedbank, told ERR radio.
While Lithuania’s growth was also due to the low base of comparison from a year ago, its economy grew by 0.8% QoQ, which was also a very good indicator, the economist said.
Compared to Estonia, the Lithuanian economy is much more confident, both in households and in industry, he says.
“In addition, inflation is close to zero. Wage growth is strong, which means that the improvement in purchasing power in Lithuania has been much stronger than in Estonia, and this has also been reflected in retail growth. In Lithuania, the latest retail growth figure was around 4%,” he said.
Estonia’s economy continues to be affected by the weakness of its main export partners, Finland, Sweden and Germany. In Lithuania, exports of services have grown strongly in recent years, Mertsina says.
“Estonia’s exports of services are also significantly better than its exports of goods, but Lithuania has seen strong growth in services exports, mainly driven by financial services and various ICT (information and communication technology) services,” he said.
Lithuania is also in a stronger position than Estonia in the construction sector, helped by state investment, Mertsina says.
“In Lithuania, government investment, especially in infrastructure, grew by 38% last year, albeit in current prices. In Estonia, government investment also increased last year, but more slowly than in Lithuania,” he said.
Compared with Lithuania, Estonia’s economic growth is also held back by the impact of private sector borrowing on economic performance.
“If you compare the debt burden of households and companies, and in particular bank loans as a share of GDP, Estonia has a higher debt burden than Lithuania, and this applies to both households and companies. This in turn means that higher interest rates also have a somewhat stronger negative impact on the economy,” he said.
Other sectors that have contributed to Lithuania’s economic growth include financial technology, innovation (such as lasers and semiconductors) and the timber industry. There has also been strong investment in the defense industry.
At the same time, wage growth and unemployment rates in Estonia and Lithuania are at the same level.
“When comparing the labor market and wages, there is not much difference between Estonia, Latvia and Lithuania. Wages are growing fast in all three Baltic countries, with Latvia and Lithuania growing somewhat faster than Estonia, but the difference is not very large. The labor market is more or less equally resilient in all three Baltic countries. Unemployment is perhaps 1% higher in Estonia than in Latvia and Lithuania,” Mertsina said.
However, despite these indicators, household insecurity in Estonia is still very low: people are more afraid of rising unemployment and worsening finances than their southern neighbors; tax increases also play a role in increasing insecurity, he adds.
“Perhaps the government also needs to take more into account both businesses and households, as well as their confidence in its communication on tax increases and public finances,” Mertsina said. (ERR)