In the Baltic states current economic crisis will be less severe than previous one

Baltic Colours Photo © Ludo Segers @ The Lithuania Tribune
Baltic Colours Photo © Ludo Segers @ The Lithuania Tribune

The world economy is currently experiencing its worst crisis since the Great Depression. The outbreak of COVID-19 virus and measures to curb it’s spread has caused the greatest shock to the world economy since the Great Depression. Economic sentiment in Europe, the US and the rest of the world have fallen faster and lower in March and April than during the 2008-2009 financial crisis, Mārtiņš Āboliņš, Citadele Bank Economist, wrote in a commentary.

Many industries have been physically shut down, and more than 26 million workers in the United States have applied for unemployment benefits since mid-March. This is 16% of the total economically active population and a sharp rise in unemployment is happening elsewhere as well. Meanwhile, car sales in many markets have more than halved and global aviation has fallen by more than 70%, while in the oil markets in April we even saw negative oil prices for a short time.

Patreon the Lithuania Tribune

There are more unknowns in the economy today than known, and recovery will depend on the successful containment of the virus. How quickly will spread of the virus be curbed? Will there be second of the virus outbreak? What is the long-term solution? When will we be able to return to a previous life? Will life after the crisis be the same as before?

So far, there are many unanswered questions about the virus itself, and the modern world economy has never faced such a situation before. Therefore, any forecast of economic development at this time must be treated with a high degree of caution. However, even if it is possible to limit the spread of the virus in the second half of the year and return to regular economic activity, the forecasts are not encouraging. According to the International Monetary Fund (IMF), this situation would reduce world economic output by 3% this year, which would be the worst economic downturn in the world since the 1930s.

Restrictive measures are working, and the spread of the virus slowing down. The good news is that the restrictive measures in place are working and the number of new infections in both the Baltics and Europe is declining. This allows countries to start planning for the easing of lockdown measures and the gradual opening up of the economy. At the same time, support, the economy governments and central banks have implemented unprecedented fiscal as well as monetary stimulus measures.

According to IMF forecasts, the increase in fiscal deficits in the world will be higher this year than in 2009 and new support programs are regularly announced. The amount of economic support programs announced so far in the Baltic States also ranges from 3.5-5.0% of GDP. This is a big difference from 2009 when the Baltic countries reduced their expenditures during the economic downturn, but this year a significant increase in public spending is expected in the Baltics.

The impact on the Baltic economy is significant, but the lockdown measures have been less severe than elsewhere. At present, there are still very few indicators to assess the extent of the economic downturn in the Baltics, but short-term data suggest that the decline is quite large. Since mid-March, the volume of transactions with cards issued by Citadele banka in the Baltics has decreased by about 20-30%, and other banks in the Baltics and elsewhere in Scandinavia also report similar declines.

The good news, however, is that judging by traffic and population movement data, the restrictions on the economy in the Baltic States are not as strict as in the countries most severely affected by COVID-19. The decline in electricity consumption is also smaller than elsewhere, which indicates a relatively sustainable industrial production.

The Baltic States will suffer less from this crisis than from the previous one. So far, there are no signs that the economic downturn in the Baltics will be greater than in our trading partners. Internally, the Baltic States are in a much stronger position than in 2008. Foreign trade is balanced or in surplus, real estate prices relative to income are relatively low, lending is moderate and is financed by domestic deposits. Consequently, a 7-10% fall in GDP this year with a partial economic recovery in the next two years now seems the most plausible scenario. The IMF also forecasts a 7-8% decline in GDP for the Baltics this year, although the global economy will decline more than in 2009.

The economy will recover, but it will not be possible to offset all the damage caused by the crisis. There is reason to hope that the spread of the virus in the world will be limited shortly, but a rapid return to previous economic levels is, in my opinion, unlikely. Despite the great state support, there will be irreversible damage to the economy and, for example, this summer’s tourist season is likely to be lost.

China’s economic activity has also reached 80-90% of its previous level at best, and it is currently feeling a decline in demand from the rest of the world. Support measures in the West will mitigate the negative effects of the crisis, but other countries have minimal opportunities to support their economies. Already, 90 of the 189 member states of the International Monetary Fund have requested IMF financial assistance to overcome the crisis, and unlike in 2009, the economic downturn is also expected in developing countries.

The economy will be different tomorrow than it was yesterday. A full recovery in the global economy will only be possible when most countries successfully curb the spread of the virus. It will take time. Therefore, in the short term, it is the task of every company to survive this turmoil until the economy can return to normal function. But in the long run, this is an opportunity to rethink your business model. It is difficult to predict what the world will be like after the crisis, but it is difficult to imagine that absolutely nothing will change.

Part of the current changes in consumer and business behaviour is likely to be permanent. For example, the SARS epidemic in China in 2003 was a powerful catalyst for the development of internet commerce. At the same time, this crisis has shown the world’s heavy dependence on Chinese production. The crisis has also demonstrated that a globalised production system is efficient but fragile and politically, there could be a strong demand for changes. Especially when the acute phase of the crisis is over and both human and economic consequences become visible. These changes will not but immediate, but they will take place, and they must be prepared for.

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