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Economists: Latvian households can afford to spend more money

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUThe global economy continues growing. In addition, the role of developed economies becomes bigger as well. It is good news for Latvian exporters, because the new export markets are well-known and predictable for them. Interest rates do not become smaller, but they will remain low for a long time, so now is the best time for companies to invest, as concluded in the latest Swedbank economic outlook.

Global economic growth will be weaker than expected in 2015. It will be mostly affected by short-term weakness of the economy in the United States of America at the beginning of the year. It is expected that global economic growth will become stronger in 2016 and 2017. There are good conditions for a more rapid economic growth in USA the situation on the labour market is slowly improving, the level of optimism exhibited by consumers and companies is good and promises growth in consumption and investment activity. Even in Eurozone the largest fiscal consolidation measures are over and monetary stimulation activities are becoming wider. The situation in Nordic countries varies – growth in Sweden and Denmark is becoming stronger. Norway, on the other hand, is affected by a rapid decline of oil prices. Events in Russia are currently slowing Finland’s economic growth. The largest concerns apply to developing markets – the decline in Brazil’s economy is not expected to end soon. Large risks remain in China and India. Russia’s economic recession is becoming deeper and its very weak growth could appear in the middle of 2016. The upcoming interest rate increase by the U.S. Federal Reserve will strengthen the U.S. dollar, which, in conjunction with China’s recent devaluation could negatively affect already unstable balances of developing markets, as mentioned in the outlook.

A truly hot summer continues in Greece – the country has seen a dead end in talks with creditors, a crisis in its banking sector and capital control, a referendum and default against IMF. The agreement on the next bailout plan was nonetheless achieved, debts were paid, new loans accepted. And now the country faces new elections. This story will not end soon. Any possible outcome provides for the write-off of some of Greece’s debts – it is the cost for geopolitical safety in EU’s south. A drama, but only for Greece – financial markets see it more and more as an isolated case. It is not expected that problems of this country will affect economic growth in Eurozone, experts say.

Swedbank economists increase Latvia’s GDP growth forecast for 2015 from 1.9% to 2.1%. This is because of a surprisingly strong second quarter of the year. It seems growth in the first half of the year was also more rapid than expected, because exports and investments were more powerful and capable of compensating more careful rise of households’ consumption rates. Growth may yet decline in the second half of the year because of weak external demand and possible obstacles from Russia in regard to railway cargo transport, economists say.

Economic growth is expected to be more rapid in 2016 and 2017. It seems that 3% is Latvia’s new reality – without massive structural reforms and/or much higher external demand, the country can forget about sustainable 4-5% growth. It is expected that because of global economic and European growth, export and investment growth will become more rapid and secure. Household consumption growth will remain relative strong – more cautious this year and somewhat stronger in 2016-2017. At the same time, it is worth mentioning that economic growth may be even slower – the main risks are external (Russia and Eurozone), economists say.

Up until now, exporters have been exceeding expectations by successfully reorienting their activities from crumbling CIS markets to others. However, development is uneven and fluctuating among industries. More capable growth in developed countries is good news, because these markets are familiar to Latvian entrepreneurs and relatively predictable. Households’ demand growth in Latvia is relatively stable. It is important to consider political risks in Russia.

Considering the expected rise in demand, currently low interest rates and high workload in many industries it is time to invest. New loan services are on a rise, and this activity is expected to become even more active. If companies do not invest now, their European competitors will end up in the lead, because investment and loan activity there is already on a rise. Considering rising labour costs and the declining number of residents of working age, investments in machinery and digital solutions are necessary to reduce dependence on labour force. Investments to increase capacity as just as important. Otherwise it will be much harder and more complicated to expand export volumes, Swedbank experts add.

Income of households continues to grow, mostly because of rising wages. It is expected that average wages will grow around 6% annually. Swedbank economists predict PIT will not be reduced in 2016, and minimum wages will be increased only by EUR 20. Creation of new jobs will be slow. Decline of prices for raw materials and its influence on prices of fuel, gas, heating energy and food products will maintain price rise at an insignificant (0.5% on average) level and a moderate 2% in 2016 and 2.3% in 2017. Prices of certain services may grow slightly faster.

In general, households can afford to spend more money. Deposits have grown. Households now more often pay back current loans than take on new debts. Low interest rates are beneficial for loan takers.

As for what all this could mean for the government, economists say State Revenue Service’s administered tax revenue has grown by 5%. Finance Ministry finally admits that revenue will be lower than expected and budget deficit will be higher than the amount stated in 2015 Budget Law – economists had previously warned about this. This means negative fiscal space in 2016. It is likely PIT will not be reduced next year; tax increase will be lower and shadow economy combating measures will continue as well. But there is no need to over-dramatize the situation. There is a lot of space for manoeuvring there. However, it is worth mentioning yet again that without a far-sighted and brave strategy for either reducing or increasing income, the government will continue facing regular shortage of funds for its priorities, experts say.

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