External environment in the Baltic States and Ukraine

Lithuania

In Q4 2020, seasonality-adjusted GDP decreased by 1.3% y/y. While public consumption showed a favorable growth rate, the other GDP components recorded a decline. It is expected that the COVID-19 pandemic will continue to exert an adverse impact on the economy, yet the economic activity should improve at the beginning of Q2 2021.

In December 2020, the unemployment rate was 10.1%, thus by 3.7 p.p. more than the year before. The COVID-19 pandemic deteriorated to a significant extent the situation on the labor market. Employees affected most were those from the services sector and with low qualifications. Unemployment had a slightly weaker impact on commerce, construction industry, transport and production activity. At the same time, a high supply of jobs is being observed, which in the situation of growing unemployment shows structural changes in the labor market. On the one hand, the number of people looking for work has increased considerably; on the other hand, companies are not able to fill the existing vacancies. Structural unemployment may therefore relatively quickly change into long-term unemployment, which poses a threat to the labor market and to prospects of economic growth.

In 2020, inflation subsided to low levels, with the annual rate of 0.2%. At the beginning of the crisis caused by the COVID-19 pandemic, the inflation was considerably reduced as a result of the global decrease in demand for energy goods and their prices; with the second wave of the pandemic, the inflation remained lower because of the already visible impact of the crisis on prices of services.

Latvia

Latvia’s GDP fell down in Q4 2020 by 1.7% (annual data, adjusted for seasonality), i.e. lower than in Q2, when the decrease was 8.9%, and in Q3, when it reached 2.6%. The data suggest that the economy recovered faster – the production sectors did not show a decrease in production, and the service sectors quite quickly restarted business activity. The major cause of the economic downturn in 2020 was a decrease in private consumption resulting from the restrictions introduced because of the COVID-19 pandemic, which significantly limited business activities. That was at the same time prevented by the increase in expenditures on public consumption. In terms of sectors, the downturn was most marked by a decline in the transport sector, business connected with accommodation and catering as well as cultural, entertainment and leisure areas. A growth was observed only in the construction industry, agriculture, public administration and defense.

Data of the Latvian statistical office show that in December 2020, the actual unemployment rate was 8.3%, i.e. it was higher by 1.7 p.p. than in December 2019. The number of unemployed increased by 16.8 thousand y/y and reached 80.5 thousand at the end of 2020.

The annual inflation rate was -0.5% in December 2020, commodity prices dropped by 1.4%, whereas prices of services grew by 1.6%. Compared to December 2019, the average level of consumer prices was mainly affected by a fall in the prices of commodities and services related to transport, housing maintenance, clothing and footwear. On the other hand, price increases were recorded for food, tobacco products and non-alcoholic and alcoholic beverages, as well as for leisure, cultural and catering services and in the area of healthcare.

Estonia 

In Q3 2020, when the restrictions imposed in the spring because of the COVID-19 pandemic, the annual GDP growth rate in Estonia was at -1.9%. After the first wave of the coronavirus, the business activity recovered quite quickly but unevenly. The reduction in restrictions contributed to a rapid recovery of private consumption but exports were still dependent on restrictions in other countries. The adverse influence on the economic situation was seen in the tourism sector, hit hardest by the crisis.

At the end of 2020, the unemployment rate stood at 7.4%, up 3.3 p.p. compared to December 2019. The economic recovery, with the simultaneous shortage of workforce, was conducive to an increase in the average salaries and wages, which was 3.2% in Q3.

The annual consumer price index (CPI) stood at -0.4%. Prices reacted strongly to the outbreak of the pandemic in the spring and to the consequent rapid decrease in oil prices. By November, energy prices fell (mostly fuels), dramatically increasing only towards the end of the year. From the beginning of the pandemic, food prices grew, which also resulted from a relatively quick increase in prices in external markets. In Q4, the consumer price index stabilized at -0.8%.

Ukraine

After years of political and economic tensions, the Ukrainian economy overcame the signs of crisis and, before the outbreak of the COVID-19 pandemic, went into a stage of recovery, although with a modest growth rate. In 2020, however, as a result of the pandemic, there was a decrease – in the third quarter, the annual GDP growth rate remained at -3.5%. The annual inflation rate was 5% in December, thus reaching the center of the target range of 5.0% ±1 p.p. defined for 2020. The unemployment rate rose to 9.3% in September 2020¹ from 8.2% in December 2019.

After 11 months of 2020, a negative balance of foreign trade in goods and services was recorded (USD -1.3 billion). The conflict in the eastern part of Ukraine is still harmful for the economy. The loss of control over resources in this part of the country significantly reduced Ukraine’s export capabilities because of disruptions connected with mining production and with electricity generation.

¹ according to the definition of the International Labor Organization (ILO)