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Friday 21.10.2016 | Name days: Severīns, Urzula

Economic Diary of Latvia. In the zone of low inflation

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUPrices of goods and services remain largely the same in Latvia. According to data from the Central Statistical Bureau of Latvia, the average annual level of consumer prices in Latvia increased by a mere 0.6% in June, as compared to the same month of 2014.

There is nothing good for the economy that, even though consumers tend to believe the opposite: prices on goods become cheaper and therefore the goods become more easily accessible. However, according to traditional economic theories, a healthy economy’s inflation should be within 4-5%. According to Governor of the Bank of Latvia Ilmars Rimsevics, Latvia’s economy is currently in a state of ‘healthy stagnation’.

The head of the Bank of Latvia has made multiple interesting announcements lately. This week, he announced that Latvia will definitely not suffer from the crisis in Greece. He added that Eurozone will only become stronger in a long-term perspective from it. Latvia did not provide Greece money and its trade relations with it are minimal. Rimsevics said Eurozone is very stable at the moment.

Eurozone, in which Latvia holds membership, does, in fact, demonstrate signs of stability. The exchange rate between euro and dollar has declined, but it is insignificant (around USD 1.1 = EUR 1).

The debt crisis in Greece has not yet made any significant impact on the monetary bloc. It has, however, impacted countries that are not part of Eurozone – Sweden, Switzerland, UK and Poland. As noted by Bloomberg, the Greek crisis has found a new corridor for spreading into other countries – through the currency market with a volume of USD 5.3 trillion per day.

National banks in Sweden and Switzerland are worried about the perspective of euro’s weakening due to the Greek crisis. Both regulators try to spark up inflation, but the strengthening of currencies will make this task more complicated. The Bank of England, whose pound sterling jumped a seven-year peak last year, is also worried about the slowing of growth of the British economy under such an exchange rate.

«Countries with currencies like the Swedish krona and the Swiss francs should be worried about euro’s weakening,» – as Bloomberg reports the words of Stewart Bennet, London head of currency strategy in the largest bank of Spain Banco Santander SA. Such a development would make low inflation combating measures more complicated. The Bank of England is not likely too happy about the strengthening of the pound sterling as a security asset. The European problem has become a global risk on the currency market. (This is where the barely visible to the majority of people link between healthy currency and healthy price rise should be mentioned)

In June, when negotiations of the Greek government with creditors stopped at a dead end, the Swiss central bank sold francs to hold off the strengthening of the currency. The Swedish central bank then unexpectedly reduced the key interest rate, which was already at zero, in order to prevent krona’s strengthening. Leaving it the same could have caused deflation. The Swedish regulator had said it then that it is hard to predict the consequences of the Greek crisis.

One would ask: how can the problems that have begun in those countries possibly affect us? The answer is that these problems can have a most direct impact: plenty of Latvia’s living and working in those countries send money to Latvia. So what Mr. Rimsevics says about the insignificance of the Greek crisis for Latvia is open for debate.

Latvia’s green gold

Economy is interesting mainly because it’s full of different paradoxes and often subverts cleaver theories. For example, Latvia can earn around EUR 300 million annually on Russia’s sanctions against…Finland. This will happen if Russia stops supplying wood to Suomi and the Finnish decide to cut Latvian forests.

The head of the Russian Forest Association Department of Metsäteollisuus Jukka Halonen mentioned in an interview to Yle radio station that the possible restraining measures by the eastern neighbour came as a surprise for him. According to his information, 13% of wood (equal to EUR 300 million annually) for Finland’s wood working industry came from Russia in 2014. Part of the losses from it can be compensated at the expense of Finland or other Baltic Sea region countries, including Latvia.

Wood processing industry remains the sector of Latvia’s processing industry that provides positive growth dynamics. According to information from the Central Statistical Bureau of Latvia, this industry’s output volume grew by 6.5% in May 2015.

Even though not all Latvian enterprises are doing all that well, Latvia’s production industry is fairly well off. Under a more detailed review it is clear that the decline is noted mainly in the industries that have had strong ties with Russia up until a certain point in recent history. This mainly applies to food production and textile industry.

At the same time, Latvia’s largest industrial sector, wood processing, remains in the positive: production output had grown by 2.7% in May and by 6.9% in the past five years. Statistics were affected by the launch of a large granule production process in Gulbene in the second half of 2014 and the positive situation on the European market of saw materials.

However, as noted by Igor Krasavtsev from Latvian Forestry Federation, June is not expected to be all that successful. Hurricanes in Germany and Poland have devastated forests there. Now there is a lot of cheap raw materials there to make Latvia’s products less competitive.


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