Last week's news brought us information about how the economy fared in the third quarter. The picture was far from rosy – economic decline continues. Like Estonia, all European Union member states have published their third-quarter results, providing an opportunity to compare Estonia's situation with its peers.

Rather than broadening the perspective too much, let's focus on comparing Estonia to Latvia and Lithuania. The overall picture, based on the numbers, is as follows: Estonia is doing poorly, Lithuania is performing well and Latvia is somewhere in between.

How are things now?

Looking at the third-quarter data, Latvia posted the worst year-over-year result, with GDP declining by 1.6 percent. In Estonia, the decrease was 0.7 percent, while Lithuania experienced growth of 2.4 percent.

Lithuania's success has been attributed to its economic structure, greater government support and geographical location. The economic structure means that Lithuania's industry is somewhat more diversified than in Latvia or Estonia. Additionally, Lithuania received a substantial boost from IT entrepreneurs who emigrated from Belarus and are now developing their businesses in Lithuania.

The Lithuanian government provided greater support to its businesses during both the energy crisis and the COVID-19 pandemic. Furthermore, Lithuania's primary export partners are in Central Europe, unlike Latvia and Estonia, whose main markets are in Scandinavia. Poland, one of Lithuania's most significant trade partners, is also performing well.

What happens when we take a closer look at the economic sectors?

In Estonia, it is evident that key sectors such as industry and construction have not yet entered a recovery trajectory, at least based on third-quarter results. Construction output remained negative in October, as it had been in the third quarter. While trade has begun to show some signs of recovery, it is still too early to talk about robust growth.

Latvia is facing a very similar situation. In Latvia, manufacturing fell by 2.1 percent in the third quarter, while construction dropped by 6.9 percent. The transport sector also experienced a significant decline (-7.7 percent). The IT sector saw a slight decrease (-2.7 percent), while trade grew by 4.7 percent and the hospitality and catering sector grew by 2.1 percent.

In Estonia, the decline in manufacturing was even steeper, with a year-over-year decrease of 7.1 percent and a 14 percent drop compared to the second quarter. Construction showed a year-over-year decline of 18.3 percent and a 5.2 percent drop compared to the previous quarter. Trade was slightly positive year-over-year, and the IT sector grew by 7.3 percent. Compared to the second quarter, growth in trade (+11 percent) and the IT sector (+22 percent) was significant.

Lithuania's strength in industry and export capabilities is evident in its 8.8 percent annual growth in the third quarter compared to the same period in 2023. Lithuania's statistics office aggregates data on trade, transport and hospitality into a single indicator, which showed a 6 percent year-over-year increase. However, construction was less positive, with a year-over-year decline of 6.1 percent. The telecommunications and IT services sector also experienced a slight decrease (-2.7 percent).

Looking at GDP performance since the beginning of the year, Estonia's economy has shrunk by 2.2 percent, Latvia's by 1.3 percent, while Lithuania's has grown by 2.5 percent.

Thus, it can be expected that by the end of 2024, Estonia's economy will have contracted by 1-1.5 percent, Latvia will show essentially no growth (0-0.5 percent) and Lithuania could see economic growth of around 2.5 percent.

What will the new year bring?

What truly matters is what will happen next year. The Baltic states are small, open economies, so the first step is to turn our attention abroad.

Europe, as a whole, is anxiously watching the United States, where Donald Trump's rhetoric has been particularly vocal. Right out of the gate, he promised to impose 25 percent tariffs on Mexico and Canada unless they address illegal immigration and drug trafficking. Negotiations are already underway, and it's unlikely such drastic trade restrictions will materialize. Trump has also threatened BRICS countries with a 100 percent tariff if they proceed with creating a common currency and abandon the U.S. dollar. The idea of a unified currency has been floated by Russia, led by Vladimir Putin. Whatever becomes of these grand plans, some tariffs are likely, and it's doubtful that European exporters will remain completely unaffected.

Trump has also pledged to reduce focus on climate issues. If Europe sticks to its original Green Deal timeline, it will undoubtedly undermine the competitiveness of EU member states in the future. On one hand, businesses will face increased reporting obligations, and on the other, Europe will remain dependent on energy imports if fossil fuel-based energy production is curtailed.

Another major concern in Europe is Germany's economy, which is grappling with serious structural problems. Economic models built on cheap Russian gas no longer function, and almost daily, news emerges from Germany about massive layoffs and factory closures. Recent headlines have been dominated by strikes in the automotive sector. The political leadership in Germany also remains uncertain, as parliamentary elections won't take place until February. Until then, a lot could happen. One thing is clear: the economic situation is fueling the rise of political extremism, a trend we've already witnessed in several parts of the world. If the right-wing populist Alternative for Germany (AfD) truly becomes the next "kingmaker," unexpected developments could unfold. These range from a revival of nuclear energy to the complete closure of borders to third countries – not to mention a favorable stance toward Russia as a strategic partner. At least, that's what their platform suggests.

The third unknown is how the geopolitical situation might evolve. Will international efforts succeed in ending the war in Ukraine, and with what consequences? How will Ukrainian refugees move, if at all? Could another geopolitical crisis emerge, potentially sparking yet another refugee crisis in Europe? These are pressing questions with no clear answers.

What do these developments mean for the three Baltic states? Tough times lie ahead. Estonia's misfortune is that, in addition to the turbulence in the external environment, we are hindering economic recovery with our economic policies. Latvia and Lithuania are not doing so – at least not to the same extent as Estonia. This calls for caution against overly optimistic projections for the future. Even if Lithuania is currently doing relatively well, Germany's problems will soon cast a shadow over both Lithuania and its close neighbor Poland. Poland's advantages include robust domestic consumption by European standards and its own currency, which provides flexibility to cushion economic shocks through devaluation. On the flip side, devaluation makes a country's citizens poorer relative to the rest of the world. Lithuania does not have this option. For this reason, I am not particularly optimistic about next year's developments. If we see positive growth numbers in all three Baltic states, it will be a good outcome – likely in the same order as now: Lithuania leading, Latvia in the middle and Estonia bringing up the rear.

One can always console oneself with the thought that forecasts are often inaccurate and real life can be entirely different. Time will tell.

--

Follow ERR News on Facebook and Twitter and never miss an update!