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Friday 22.06.2018 | Name days: Ludmila, Laimdots, Laimiņš

Expert: economy progresses forward in spite of political uncertainty

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUGrowth of Baltic economies is expected to speed up under influence of global perspectives and domestic growth powers. Latvia’s growth will be driven forward by consumption and better external conditions, as well as inflowing EU funds, SEB Bank macroeconomic expert Dainis Gaspuitis shares his predictions with BNN.

«Although the level of international disputes has grown lately and political challenges should not be underestimated, protectionism rhetoric has been translated into actions at a very small degree. Growth of synchronized activity in the world observed at the beginning of the year will continue. GDP increase in OECD member states will be 2.1% on average this year and 2.2% in 2018,» Gaspuitis predicts.

The economist says mood indexes suggest a slightly larger growth. At the same time, main social challenges – economic inequality, population ageing and loss of jobs due to digitization and automation – will remain topical.

«Uncertainty of the global economic policy is currently on the highest level it has ever been. It is also deeply saturated with populism and protectionism. As expected, the economic policy of U.S. President Donald Trump turned out to be hard to realize, and the president has changed his views on multiple topics in recent months. Relations between Russia and USA have nonetheless improved. Global trade is showing a tendency to grow at a stable rate. Generally positive signals are also noted in growing economies, including China. Investment cycle’s recovery largely balances political risks around the world,» Gaspuitis continues.

He estimates that following the decline of activity at the beginning of the year, GDP growth in USA will be 2.3% this year and 2.5% the next. Positive flow will be balanced by a strong labout market and growing capital costs. «So far everything we have seen has indicated that Trump’s economy will not be able to reach planned stimuli levels, which will limit growth. The situation on the labour market is gradually becoming more and more tense, because unemployment is set to decline to nearly 4%, and wage rise is expected to reach 3.5%».

Rapidly growing economies have adapted well to new conditions, making them more flexible against growing interest rates in USA. Nevertheless, high debt level and political risks still maintain uncertainty. China’s GDP is set to grow 6.7% this year and 6.3% the next. The situation in industrial and construction sector is set to improve, but government institutions will likely establish stricter loan requirements, the expert comments. «Looking at the future, it will reduce growth rate and the risk of financial imbalance. Other BRIC countries, especially India, will contribute much to global economic growth.»

In relation to Eurozone’s GDP growth, Gaspuitis predicts growth of 2% for this year and the next. «A wide spectrum of improvements is expected, especially for the situation on the labour market and investments sector. Political uncertainty has declined. It is still possible that Germany’s parliamentary elections could bring unexpected developments. Long-term risks remain. France’s new president will face massive challenges and problems, and it is hard to predict the possible results of the new policy,» the expert continues.

He notes that Italy’s factor is like a major financial and political risk. «Brexit process will be accompanied by heavy and aggressive rhetoric and repositioning of involved sides. Although Theresa May and her government will strengthen its positions after elections in June, there is still a high possibility that Brexit talks will end up in a dead end. Political uncertainty will definitely affect Britain’s economy.»

Gaspuitis says the risk of pro-cyclic fiscal policy in USA has declined. Financial conditions have improved in spite of increased rates. The economist predicts the European Central Bank will gradually change its approach and reduce its deposit rate for banks by 15 points in September 2017, as well as reduce monthly purchases of securities.

«Tendencies on financial markets are controversial. In spite of political uncertainty and concerns about the ability of Chinese and American politicians to cause shocks on the world stock markets is close to their historic levels. The fluctuation index is currently on the lowest level of the past ten years. Based on future growth of profits and higher economic activity, prices of shares may continue growing. Brent crude price will likely fluctuate within 55-60 USD/barrel,» the expert continues.

«Economic growth of Baltic States will speed up under influence of global perspectives and domestic growth engines – consumption and capital costs. Latvia’s growth will be affected by consumption and better external conditions, as well as inflowing EU funds. Positive influence is expected to come from tax reform, which will strengthen competitiveness and growth potential. GDP growth will reach 3.5% in the next two years. The largest risks and challenges are associated with limited labour force accessibility and slow productivity rise,» Gaspuitis says.

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