Vaidas Žagūnis, Member of the Management Board, Chief Corporate Commercial Officer
Each Baltic state continues to exhibit very different business loan dynamics. Lithuania has been recording a record volume of new business loans for some time now but the momentum is slowly deteriorating. The dynamic of business loans in Latvia has been positive since the end of 2022, but lately the growth rate has been hovering around zero. Estonia continues to be the only Baltic country where the volume of new business loans is shrinking but it seems that in the second half of this year, Estonia will stand out with the most positive dynamics of business borrowing.
Slowing acceleration of Lithuanian indicators
In June, the Lithuanian business loan market broke another activity record, but we can see the slowdown in the pace of growth of business loans more clearly. In June, the growth has already been the slowest since November 2023. Companies continue to borrow actively, but not as actively as at the beginning of 2024.
The latest dynamic of Lithuania’s GDP also reflects this. In the second quarter of this year, the annual growth of Lithuania’s GDP reached 1.4 percent, but it was half as strong as in the first quarter, while the Lithuanian economy grew by 3 percent in a year. We see similar trends when we evaluate the preliminary indicators of the business cycle of the Lithuanian economy. It seems that the optimism of the Lithuanian industry and retail trade sectors has reached its peak. However, the construction, transport, and logistics sectors that have stagnated until now, will finally see the light at the end of the tunnel.
On the positive side, the Lithuanian builders have recently improved their assessment of the volume of orders and plan to increase the number of employees - such positivity is reflected in the data even after eliminating the effect of seasonality. The bottoming out in Lithuanian housing loans likely influenced the optimism of the Lithuanian construction sector: the recovery of the volume of new housing loans has been observed for several months in a row. Most likely, this is a new trend – the Lithuanian mortgage loan market reacted sensitively to the recovery of purchasing power and the start of lowering base interest rates in the eurozone, in a good way.
However, the preliminary indicators of the Lithuanian industry have not been improving recently. This is likely related to the fact that German industry has failed to recover. Citadele bank models show a probability of around 70% that the production volumes of the Lithuanian industry will continue to grow in the next few months. However, the continuing decline of the German industry is worrying and, accordingly, we see the risk of slower growth of Lithuanian exports.
Positive news in Estonia
In Latvia, the volume of new business loans in June was 20% higher than in autumn of 2022, when the minimum was reached. On the other hand, recent growth in new business loans has been minimal. This data basically reflects the current Latvian business cycle. The leading indicators of the European Commission show that, as in Lithuania, the optimism of the Latvian industry has fallen somewhat recently, the level of optimism of Latvian consumers is moving from growth to stabilization, including the consumers‘ assessment of their finances.
The expectations of the services and construction sectors have been stable for some time, while the optimism of companies in the retail trade sector has faded somewhat recently. In the second quarter of this year, Latvia’s GDP was 0.4 percent lower than in the second quarter of 2023. Both actual statistics and leading indicators show that the Latvian economy is currently balancing between a slight recovery and stagnation, which is also reflected in the dynamics of business loans.
Estonia continues to lag behind other Baltic states in the context of the dynamics of business loans - but it seems that this situation will change in the near future. In June, the 12-month moving average of the new business loans in Estonia was 1.7% lower than a year ago, whereas the annual growth of new business loans in Lithuania reached 22% and 4.2% in Latvia. However, leading indicators of the business cycle show that the Estonian economy is getting stronger, and the peak of the economic crisis in Estonia has already been reached.
Data from the European Commission show that Estonia’s industrial confidence level in June was the highest in 1.5 years, which was probably significantly influenced by a break in the expectations segment of Scandinavian construction and real estate companies. It is likely that the minimum of real estate market activity in Scandinavia has been reached, which was enough to suddenly improve the expectations of Estonian industrial companies.
Not only that, the level of optimism in Estonia’s service and construction sectors has increased significantly recently. The biggest challenge for the Estonian economy at the moment is pessimism in the retail and consumer segments, but with the recovery of exports of the goods and services sector and the further reduction of base interest rates in the eurozone, the recovery of domestic demand in Estonia should also begin at the end of this year and at the beginning of next year.