«Growing demand in Latvia’s export markets along with inflow of EU funds and more active investment activity this year and the next will promote economic growth in Latvia and help create new jobs,» BNN was told by Swedbank representatives.
Swedbank Latvia chief economist Martins Kazaks says that the general mood of businesses in Latvia is stable and improving. The economist explains that with slow speed-up of corporate lending, which means improvement of investment activity. «The general mood of households also improves. Nevertheless, their behaviour remains rather cautions. A long-awaited tax discussion has commenced. It could increase Latvia’s economic growth potential,» said Swedbank Latvia chief economist Martins Kazaks.
The outcome, however, will depend on reasonable and consequent communications, which so far has been weak and fragmented, Kazaks says.
Risks remain, but global economy grows
«The world economy will not be too well in the near future as it is now – growth is solid and corporate studies demonstrate optimistic mood and continuation of growth. Recent months have not been too kind for populism – populists failed to secure victories in elections in Netherlands and Bulgaria. It is too soon, however, to rest,» the economist says.
According to Kazaks, elections in France and Italy may yet result in a couple of unpleasant surprises. The lack of clarity about the U.S. president’s policy and its possible impact on international trade and geopolitical situation remains.
«After the failure with healthcare reform, financial markets have begun doubting Trump’s ability to realize pre-election promises. UK has started the Brexit process. Soon talks will commence in regards to the future trade regime between the UK and EU. Time will tell just how painful Brexit’s influence is,» Kazaks explains.
The economist explains that no negative influence has shown up in Latvia’s export data so far. What happened was exactly the opposite – in spite of the value decline of the British pound sterling, Latvia’s export value to UK had increased last year. Economies of Latvia’s partner countries continue to increase, which means good tidings for Latvian exporters. «Economic growth in Eurozone will remain around 1.7% this year and the next. It will remain influenced by the European Central Bank’s stimulating monetary policy and low interest rates,» says the bank’s representative.
Kazaks predicts that following the declining negative effects of the financial crisis and return of inflation, monetary support will gradually reduce. «The Federal Reserve System continues raising base rates, and we expect FRS to raise the base rate interval twice this year and two more times next year. If no negative developments shake Europe in the near future and Eurozone’s economy will continue growing according to the sketched scenario, the European Central Bank could begin gradually reducing active procurement volumes at the beginning of next year,» Kazaks predicts.
Deposit rates could start growing in the second half of next year. Refinancing operations rate could be increased at the end of the year, which means EURIBO could come close to 0 at the end of next year.
Can Latvian households finally start believing in more rapid economic growth?
Last year looks better in statistical data than it was previously reported. Latvia’s GDP grew 2% last year, which is rather good, considering delays and investment declines with EU fund programmes and the crisis in construction. And we have overcome the critical point in investments already, Kazaks said.
The economist explains that quarterly investment growth had returned in small pluses last autumn. «It seems this year that realization of EU projects is quicker this year when compared with the last. Nevertheless, it is slightly behind the plan. We expect the positive influence of EU funds on the labour market and investments will pick up in strength along with the beginning of a more active construction season,» says the bank’s representative.
He explains that the mood index of companies have been either good or improving lately. The most rapid growth is observed in the mood of construction contractors. This means EU funds are already reachable. «Corporate lending is beginning to speed up as well. Banks’ corporate loan portfolio grew by an average of 2.7% in the first two months. More active private and public sector will help pull construction up from the crisis and help create new jobs.»
Kazaks also predicts growth in Europe will be slightly higher than expected. External demand, according to the economist, will also be higher, which opens new paths for exporters and new jobs in the industry.
«The unemployment level will start declining more quickly. In 2018, it will decline to 7.5%. Declining number of residents will maintain pressure on wages, which will grow more rapidly than last year – by 6-7% this year and the next. Inflation has returned. This is why residents’ purchasing power will grow more slowly than wages. Price rise this year and the next will reach 2.2 – 2.5%,» the economist comments.
Kazaks predicts rising labour costs will pressure companies’ profit margins and threaten competitiveness more. ‘Businessmen should use this time, when lending is cheap, because interest rates are at their lowest point in recent years, and invest in productivity. In addition, the return of inflation makes lending more affordable, because actual rates remain low. It seems that even households are beginning to believe in economic growth,’ the bank notes.
The economist notes that growing labour market and growing wages means good news for households. Studies show that their mood slowly recovers from the rapid drop at the end of last year. «It should have a positive effect on households’ desire to spend money and borrow. Banks’ loan portfolio continues to decline, but slowly. It is expected that the loan portfolio may start growing again at the end of 2017 or beginning of 2018.»
Households’ deposits continue growing by approximately 7-9%. Return of inflation could be bad for people making savings, because it eats away part of the value of savings. This is why people should be smarter and invest that money in either education or housing, says the expert.