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SEB: Latvian, Lithuanian GDP per capita may overtake Estonia's in future

SEB's Baltic economists, with SEB Estonia economist Mihkel Nestor on the left. Sept. 5, 2017.
SEB's Baltic economists, with SEB Estonia economist Mihkel Nestor on the left. Sept. 5, 2017. Source: (SEB)

Latvia and Lithuania's respective GDP per capita may outgrow that of Estonia in approximately 20 years, according to SEB Estonia economist Mihkel Nestor.

Estonia's GDP per capita is currently 22 percent higher than in Lithuania and 27 percent higher than in Latvia. In terms of purchasing power parity, however, Lithuania has already managed to overtake Estonia, SEB economists said on Tuesday.

Nestor said that, assuming that the Latvian and Lithuanian economies will grow at a rate of three percent annually and Estonia's GDP will expand by two percent, Lithuania will outgrow Estonia by 2031 and Latvia will surpass it by 2038. He also admitted, however, that, in reality, growth rates will be very similar in all three countries.

The economists noted that the issue of the overheating of the economy is currently on the agenda of all three countries. Tadas Povilauskas, senior analyst at SEB Lithuania, said that even though formal indicators are not signaling overheating yet, familiar symptoms are beginning to re-emerge in all three countries.

"Once again, we are seeing a rapid increase of wages and inflation at the same time, and private consumption in Latvia and Estonia is growing," Povilauskas said. "However, crediting and real estate market are not showing any anomalies yet."

The economists said that the tax systems in all three Baltic countries are very similar, noting that Latvia and Estonia will see large-scale changes to their respective tax systems next year and Lithuania is also planning some improvements. At the same time, the amendments are moving in one direction, bringing in greater progression, new solutions for starting companies and an increase in excise rates.

"Tax systems are very similar, and countries are trying to copy the best solutions from each other," said SEB Latvia macroeconomics expert Dainis Gašpuitis. "Discussions about a progressive tax system are present in all three countries. However, none of the Baltic countries are ready for a progressive tax regime in its full extent. Meanwhile, all three countries are looking for opportunities to maximize economic growth by shaping the tax system according to needs of companies."

The economists said that from a foreign investor's perspective, the Baltic states comprise a rather homogeneous region; each country has its own advantages in select areas, but their economic challenges are very similar: aging society, availability of workforce and productivity.

Editor: Aili Vahtla

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