Inflation has so far proven to be both higher and more persistent than previously expected, and central banks were late in taking away the punch bowl. Households around the globe are holding back on consumption as the cost-of-living shock hits and as higher interest rates make debt more costly.
In Europe, the war in Ukraine and the energy crisis are an extra drag on economic activity. The energy crisis is also expected to worsen during the winter, which will cast a shadow on the economic outlook for Europe.
Yet, despite the geopolitical shocks, energy crisis, and inflation hovering at quarter-century highs, the Baltic economies have remained relatively resilient and grew faster than expected in the first half of this year. We are revising this year’s GDP forecast upwards, but foresee a few negative quarterly changes. The good news is that weaker local and global demand should be sufficient to bring inflation down to normal levels by the second half of 2023.