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Saturday 23.06.2018 | Name days: Līga

Economists warn about Latvia's job market risks in the near future

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RULatvia is expected to experience a rather rapid economic growth in 2013 and 2014 – nearly 4-5% per year. Exports and investments gradually become stronger. External demand increases as well, as reported by Swedbank economists.

Increase of wages and number of employed persons will depend on households’ consumption. Unemployment will continue to decline in Latvia. Inflation will remain moderate. However, this outlook has a number of hidden risks. The main risk is the overheating of Latvia’s job market – this risk will likely become more apparent in 2016, as Swedbank’s experts warn in the latest economic outlook.

The job market is currently the main risk for Latvia’s long-term economic growth. If it does grow significantly in the next couple of years, it will definitely exceed growth rates of productivity. At first, it will likely increase consumption and provide a more rapid GDP growth. However, if the rise of wages is more rapid than productivity, this reduces competitiveness and creates additional risks. As expenses increase, competitiveness drops and exports stagnate. As a result of this, residents lose optimism and the will to spend money, as well as entrepreneurs’ will to invest. A rapid growth rate increase of Latvia’s GDP will likely be followed by a steep decline.

According to Swedbank’s economist Lija Strasuna, wage rise is necessary to improve the standard of living and reduce emigration. However, any wage rise has to be well-earned. Unearned wage rise would mean additional expenses for entrepreneurs, which would reduce their competitiveness and cause financial problems. This may result in the need to lay off workers, and this would add to the rise in unemployment once again. Latvian enterprises understand this rather well. They invest mostly in plans to increase productivity. But entrepreneurs can only do so much.

According to her, an effective way of reducing these risks would be by performing structural reforms to contribute to work productivity. Years of economic growth are perfect for performing reforms. Unfortunately, the current rapid economic growth and the nearing of elections reduce politicians’ will to perform reforms. It means the inequality in the job market will gradually increase.

Economic growth in the world and Europe gradually becomes stronger, mood improves and interest rates will remain low for a long time. This is why Latvia’s economic growth will remain dependant on export in the next couple of years. Inflation will likely slow down households’ consumption rates. Nevertheless, households will earn and spend more. Households’ consumption will likely grow more rapidly than export this year. However, the latter will take the lead again in 2015.

In Q3 2013, export volume was lower than the year before, and the decline was short-term. It was largely due to the record harvest of grains in 2012 and Liepājas metalurg problem last spring.

As it was predicted by Swedbank’s economists, last year’s investment activity was very weak. Investment activities are expected to rise in 2014 (especially in the private sector) because of two reasons. First of all, the need for investments is large. This is dictated by the necessity to develop infrastructure and increase productivity in order to reduce pressure on expenses and competitiveness. Secondly, enterprises have the ability to invest – the debt burden has declined and deposit volume has increased and interest rates are low. Rise of investments will slow down in 2015, because enterprises will likely put off their plans in expectation of a new EU fund planning period.

Unemployment continues to decline in Latvia, it will become harder and harder for enterprises to find employees. Salaries will grow. It is expected that employment in Latvia will grow 1.5-2% in the next couple of years. The proportion of job seekers will decline 10% in 2015. This will increase the pressure for wage rise. The average gross salary in Latvia could grow 6-7% in the next couple of years.

Inflation will remain moderate and mostly with no unpleasant surprises, because the pressure of growing domestic factors will be limited by global price dynamics. Lower natural gas and heating tariffs will partially compensate the rise of electricity tariffs and the planned rise of water supply tariffs in Riga this summer. Rise of food prices is expected to be moderate. This is largely because of beneficial price fluctuations in the world. This year’s inflation in Latvia will be within 2.5%. Consumer price rise of 2015 will be slightly more rapid (this includes fluctuations of euro and dollar exchange rate). However, it will remain below 3%.

The European Central Bank is waiting. According to economists, the bank will likely retain the base rate of 0.25%. However, if inflation continues to reduce, new support measures will be introduced. Much will depend on the formation of a banking union, bank stress test results and consecutive actions. Political decisions will be vital in many countries that will be required to adapt to the rise of interest rates and China’s slower economic growth, economists say.


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