Žygimantas Mauricas, Chief Economist at Nordea

1. Belt-tightening period has ended – time for shopping?
Žygimantas Mauricas
2014.10.30

2. Eurozone will collapse
this year (2012)
Euro is an island of
stability (2014)
Greek debt
in 2008: 113%
Greek debt
In 2014: 175%
Greece loses
financial independence
(May 2010)
Greece regains
financial independence
(April 2014)
4 years of crisis
"Within our mandate, the ECB is ready to do whatever it takes to preserve the
euro. And believe me, it will be enough,“ (Super Mario Draghi, 2012 July)

3. The euro was saved - time to save the euro zone?
Double-trouble
1. Euro zone is
lagging behind
the US and
recently –
behind the UK
2. Euro zone is
divided into
North and
South

4. Euro zone has two problems: Strong euro & low inflation
“Will use all the available instruments
needed to ensure price stability over the
medium term” (M. Draghi, 2014 August)
“The fundamentals for a weaker exchange rate
are today much better than they were two or
three months ago” (M. Draghi, 2014 August)

5. ECB is ready for quantitative easing (money printing) –
cheap money & higher inflation
“If they say it, they mean it” (Mario Monti, 2014 September)
EURIBOR
FORECASTS (3M)
2014 June 0.21%
2014 Dec 0.2%
2015 June 0.2%
2015 Dec 0.4%

6. Focus on belt-tightening is diminishing
“The existing flexibility within the fiscal rules could also be “used to better address the weak recovery and to make room for the cost of needed structural reforms” (M. Draghi, 2014 August)

7. European North-South divergence is “starting to prepare to start disappearing”
GDP forecasts
2013
2014p
2015p
Euro zone
-0.4
0.8
1.1
Germany
0.5
1.6
1.5
France
0.4
0.4
0.7
Italy
-1.8
-0.3
0.5
Spain
-1.2
1.3
1.7
Baltics
2.8
3.0
2.8
Divergence
Convergence
Growth
Recession

8. Belt-tightening period is coming to an end in the Baltics
Budget deficit (2009)
EE: -2.0; LV: -9.2; LT: -9.4
Budget deficit (2014)
EE: -0.2; LV: -1.0; LT: -2.2
“Governments not only acted boldly, but also immediately. They used the momentum of the
crisis to implement the necessary consolidation and thus managed to convince the public of the
need for these measures.” (Mario Draghi, 2014.09.25)

9. Governments will open their wallets wider
Belt-tightening
Estonia: 2009-2011
Latvia: 2009-2012
Lithuania: 2009-2013

10. Consumers are also forgetting austerity
Domestic consumption growth
2012 2013 2014f 2015f 2016f
Estonia 4.9 4.2 3.1 3.4 3.4
Latvia 5.8 5.4 4.1 3.5 3.7
Lithuania 3.9 4.7 4.6 3.7 4.0

11. Lithuanian consumers are afraid of “euro-driven” inflation, but Latvian and Estonian experience shows that those fears are largely unjustified

12. In fact, consumers should better be fearing deflation – not inflation
Inflation (average annual, %)
2012
2013
2014f
2015f
2016f
Estonia
3.9
2.8
0.4
2.1
2.6
Latvia
2.3
0.0
0.6
1.7
2.0
Lithuania
3.1
1.0
0.3
1.5
2.3

13. Positive side effect of inflation: Real purchasing power of households is rising

14. Wage income and GDP divergence: Share of wages are posed to increase

15. Real estate market: Lithuania – increasing transactions, Estonia – rising prices
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
2009
2010
2011
2012
2013
Apartment prices (annual change)
Tallinn
Riga
Vilnius
%
Source: Oberhaus
-60
-40
-20
0
20
40
60
2009
2010
2011
2012
2013
Number of housing transactions (annual change)*
Vilnius
Riga
Tallinn
%
*3-month moving average
Source: National registers

16. Real estate market: Construction sector confidence declines in Estonia, stable in Latvia and Lithuania

17. Demographic “shock”: Birth rates declined & net international migration turned negative
Independence
(1991-2003)
Total: -11.4%
Migration: -8.2%
The Iron Curtain
(1981-1990)
Total: +7.2%
Migration: +2.7%
EU accession
(2004-2013)
Total: -11.1%
Migration: -7.8%

18. Baltic States have accumulated “demographic dividend” during the last decade of the Iron Curtain
Demographic
dividend
Demographic
deficit

19. Demographic situation is 2004 were as good as it can be
Children of war
Baby-boomers
X generation
Children of Socialism
Children of Perestroika
Young age:
24.4%
Old age:
21.4%
Working age:
54.3%

20. Demographics are still good in 2014
Children of war
Baby-boomers
X generation
Children of Socialism
Children of Perestroika
Young age:
20.2%
Old age:
24.6%
Working age:
55.2%
Children of Europe

21. In 2014 old-age dependency ratio will increase, but there will be more youth
Baby-boomers
X generation
Children of Socialism
Children of Perestroika
Young age:
20.8%
Old age:
29.9%
Working age:
49.3%
Children of Europe
Children of Migrants
Children of war

22. Only in 2034 demographic window will close
Baby-boomers
X generation
Children of Socialism
Children of Perestroika
Young age:
19.6%
Old age:
34.6%
Working age:
45.8%
Children of Europe
Children of Migrants
Europeans

23. Differences among the Baltics are not large
More youth
in Lithuania
More new-borns
in Estonia
Less young professionals
in Lithuania
More baby-boomers
in Lithuania

24. Women are as powerful as nowhere else

25. Baltic consumers are diversifying their basket of goods
-1.0
-4.7
-4.8

26. More fruits, vegetables & milk products

27. Soft drinks – untapped potential

28. Clothing & footwear: Cheaper and less
-1.0
-1.6
-0.9

29. Construction boom fuels sales of furniture
+0.3
-0.8
+0.9

30. Health-related goods & services have good future
+0.6
+1.5
+1.0

31. It all depends on continued convergence with the EU average levels
31 •

32. Baltic economies will remain in positive growth territory
in spite of Russian economic sanctions
32 •
GDP growth forecasts
2012 2013 2014f 2015f 2016f
Lithuania 3.7 3.3 2.5 2.8 4.3
Latvia 5.2 4.1 3.0 2.9 4.1
Estonia 3.9 0.8 0.6 2.8 3.5
Eurozone -0.6 -0.4 0.8 1.1 1.4
Russian economic sanctions will have somewhat
limited effect on economic growth: Lithuania:
0.8% of GDP; Latvia: 0.45%; Estonia: 0.45%
Source: Nordea forecasts (September, 2014)
Economic growth will slow down, but remain in
positive growth territory both in 2014 and 2015
Baltic States remained among the fastest
growing economies in the EU (2014 Q2) :
Estonia: 2.8%; Latvia: 3.5%; Lithuania: 3.1%

33. 33
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Žygimantas Mauricas
Bankas Nordea
Didžioji g. 18/2,
LT-01128, Vilnius, Lietuva
zygimantas.mauricas@nordea.com
Tel. +370 612 66291
Twitter: @ZygimantasM
nexus.nordea.com/#/profile/79803