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Tuesday 22.08.2017 | Name days: Rudīte, Everts

Economists: Latvia’s economic growth is becoming slower

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUEconomic growth has become slower in Latvia. It has become stronger and more balanced, however.

The external environment will remain relatively weak, but it will recover bit by bit. No significant changes are expected to come after Saeima elections. Even reforms are not expected to impact things all that much, believes Swedbank economists Mārtiņš Kazāks and Lija Strašuna.

According to them, differences in development rates of economies are becoming clearer. For example, USA’s economy continues its stable growth. Eurozone’s recovery, on the other hand, is becoming slower even in spite of aggressive stimulations from the European Central Bank.

Germany plays an important role in Eurozone. Internal consumption in Germany has declined recently. Economists believe there have to be fiscal policy stimulations in order to improve economic growth in the future. However, there are concerns over politicians’ ability to reach an agreement in regard to such solutions.

India has good conditions for strong market development. China’s economic growth will likely slow down. Brazil is facing enormous economic challenges and Russia’s economy is slowed by chronic structural and institutional problems, low oil prices and sanctions. Russia’s economy will likely remain weak in a long-term and short-term perspective.

‘Russia’s economy did not drown in recession earlier this year because imports had rapidly declined. Household consumption is very weak and it will likely start to decline in the near future, because the growing inflation reduces residents’ purchasing power. Investment has begun to decline even before the Russian-Ukrainian conflict, and will continue to do so in the near future, because funding is becoming scares and expensive. It is likely that Russia will descend into a recession. Very slow economic growth may return at the end of 2015 or 2016,’ – said Kazāks.

Economists have slightly reduced the outlook for the base scenario of 2015-2016. This is mainly because of Eurozone’s weak economy. The negative scenario has a 25% probability (escalation of the conflict in Ukraine, deflation risks in Eurozone, repeated fluctuations in the finance sector). If ECB provides a more powerful and effective scenario, there may be a more positive scenario.

‘There may be relatively slow economic growth, which could rise thanks to gradual economic growth of Latvia’s trade partners and stabilization of the Russian-Ukrainian conflict. Even though household consumption is likely to serve as the main engine this year, economic growth will gradually become more balanced. Negative risks remain higher than the possibility of a positive scenario,’ – says Strašuna.

Latvia’s export volumes have been good this year. This is in spite of slower development of Eurozone and low demand coming from Russia. However, considering low inflation environment (lower raw product prices and Russian embargo), it is now more complicated to increased export value. Exports to Russia are on a decline. This, however, is compensated by growth on other markets (UK, Poland, Sweden, Turkey and Hungary). It is expected that exports to European countries will continue growing relatively quickly. Liepājas Metalurgs plans to restore functionality again before the end of 2014. This could potentially increase export volumes by at least 1-1.5 percentage points. Export growth outlook is not reduced for next year in spite of expected economic decline in Eurozone.

Considering all geopolitical risks, entrepreneurs have become cautious in their investment plans. It is expected, however, that investment activity will improve closer to the end of 2015 and beginning of 2016.

It is expected that salaries will continue to grow, but slower than they did in the first half of 2014. Growth of average wages may reach 4.5% next year and 5.5% in 2016. The number of employed persons is not expected to change much. Creation of new jobs is expected to become more active in 2016. The proportion of employed persons will mainly reduce because of emigration and negative demographic trends. The proportion of vacancies grows slowly, with that there are no massive balance fluctuations on the labour market that could potentially motivate a rapid wage growth. Growth of production efficient remains slow and if the gap between wage and production does not reduce, there could be competition problems in the future.


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