This week the main state institutions of Latvia responsible for economy in one form or another competed with one another in their predictions for GDP growth in 2016. What is interesting is that serious competition was noticed for tens of a percent.
Ilmars Rimsevics, Governor of the Bank of Latvia, had previously warned about relaxing too soon after the last crisis. It is too soon to relax, he believes. Although Latvia’s GDP continues to grow, rates are becoming slower in the country and Eurozone. He had warned that the central bank would review its GDP outlook. This promise was kept. This week, the Bank of Latvia announced that its GDP outlook has been reduced from 2.7% to 2.3%.
In its assessment, the bank used poor indexes in Q4 2015. These indexes were related to reduced investments and exports, as well as the decline of VAT in construction and financial services. A slight reduction was also noted in the processing industry. Although the Bank of Latvia had predicted that economic growth would be the slowest of the year, the decline of 0.3%, based on seasonally adjusted data in comparison with the previous quarter, turned out an unpleasant surprise. All of that mainly provided for the reduction of the GDP outlook for 2016.
The central bank’s position on this was not taken well by Economy Minister Arvils Aseradens, who said that reducing the GDP outlook is too soon even considering economic trends in the EU. The Economy Ministry believes there are other indexes that can be used. For example, the situation on the labour market continues to improve and entrepreneurs successfully adapt to new export markets. This is why the ministry does not intend to reduce its GDP outlook of 3.2%.
Finance Ministry predicts GDP growth will be 3% in 2015. This institution prepares its own GDP outlook twice a year – one in the first half of February for the annual Latvia’s Stability Programme that is later submitted to the European Commission and one in June for the development of the next year’s budget.
GDP growth outlook of the European Commission is currently 3.1% and that of IMF is 3.3%.
The Bank of Latvia had also reduced its inflation outlook to 0%. Previously the central bank had predicted the average annual inflation would be 1.3% in 2016. As noted by the institution, this year’s inflation will be low because of multiple factors. One of them is slower wage growth in comparison with previous years.
Furthermore, it is unlikely 2016 will see a repeat of a rapid price decline on energy resources and food products. Nevertheless, prices on those products continued to decline at the beginning of 2016, which had a major impact on many sectors of the economy.
Inflation is expected to be increased slightly by tax changes, which affect prices of goods and services. Excise tax on fuel increased in January and excise tax on alcoholic drinks is expected to increase from April onwards.
In the negative zone
Even if GDP growth does become positive in spite of negative outlooks and inflation stays within 0%, deposit rates may go into the negative zone. The possibility of such a scenario was suggested by the head of the Baltic SEB Bank branch Riho Unt. According to him, clients of banks have yet to consider having to pay extra for their deposits. Nevertheless, such a possibility is being discussed. Previously, credit institutions served as a buffer zone between central banks and the market, but this cannot continue for long. If banks do not transfer their negative interest rates for deposits on companies, their policy will collapse, believes the banker.
SEB already applies negative interest rates for other financial institutions. Large companies with major deposits may be next, as well as medium and small enterprises.
Up until now, the bank has tried not to apply negative interest rates on private persons. Nevertheless, it is impossible to predict what may come next. In Switzerland, for example, private persons already pay for their bank deposits.
Some good news
In spite of the negative trends in many areas, there was a positive trend in one – birth rates in Latvia. It became known this week that Latvia has established a record in the European Union in regards to birth rates. The fertility coefficient (average number of births per woman) has increased almost 1.5 times over the course of the past 15 years, according to results of the latest Eurostat survey.
The highest fertility coefficient of 2014 was noted in France, where 2.1 births were noted per woman. Next are Ireland (1.94), Sweden (1.88) and the UK (1.81). The poorest demographic policy indexes were found in Greece (1.30), Cyprus (1.31), Spain and Portugal (1.32 in both). In its analysis of birth rates, Eurostat notes that the biggest recent baby-boom took place in Latvia: fertility coefficient was 1.21 in 2001 and 1.65 in 2014.