Central Europe Growth Diverging From Baltics
While we have previously called for economic growth in the Baltics to underperform Central Europe in 2014 (see 'Key Themes For Emerging Europe In 2014', December 12 2013), high frequency economic indicators imply that the divergence between the two regions is widening at a rapid pace in the early stages of the year. This is most prominent in exports and industrial production, pointing to the potential for a more severe Baltic slowdown than we had initially anticipated.
In our view, the Baltic slowdown has been exacerbated by Russia, where we have significantly downgraded our forecasts for domestic demand growth on the back of a deteriorating investment outlook. Not only is Russia an important export market for all three Baltic economies, but also a vital source of traffic and revenue through ports and other transport infrastructure. Exports from Central Europe, on the other hand, are more heavily concentrated in Germany and other eurozone member states, where we see growth picking up in 2014.
What's more, the Baltic economies are heavily integrated with each other in terms of trade and investment, implying a potential for a negative feedback loop whereby a downturn in the region becomes self-reinforcing.
|No Sign Of Baltic Turnaround|
|Europe - Manufacturing Production Volume, % chg y-o-y, 3mma|