Slower export growth, largely because of slow global trade, decline of Russian exports through Latvian ports, and slower recovery of investments will slow down Latvia’s economic growth, as stated in the latest Swedbank economic outlook.
Growth is still expected, but it will be slower than expected. This year, Latvia’s economy will grow 1.6%. With assistance from structure funds in 2017, Latvia’s economic growth is expected to speed up to 2.6%. As lending services recover further in 2018, GDP growth may reach 2.9%. This is slow growth for Latvia, notes Swedbank Latvia senior economist Martins Kazaks.
Q3 2016 was certainly weaker than expected. Economy grew by 0.8% when compared with Q3 2015. GDP growth outlook for the year has been reduced to 1.6% (2.1% previously). The main reason for this lies in delays with EU funds, crisis in construction sector and residents’ overall cautious attitude towards spending money. Processing industry is still holding firm. Growth in this sector of the national economy is recorded at 4% when compared with last year; this is also demonstrated in export data. Current account is maintained in the positive. Retail trade growth has become slower – only 1.1% in Q3.
Crisis in construction came as a shock to the labour market – the number of employees has not grown (decline has been noted in the trade sector, creation of jobs serves to neutralize declines in other sectors). The decline of the level of unemployment is very slow, the economist explained.
«Next year’s growth will become stronger. This is because influx of money from EU funds will once again activate investments in infrastructure and production. Uncertainty about the external environment will likely drag the general mood down. We may not see any rapid breakthroughs in investments next year. Construction will likely pull out of recession thanks to investments. Employment will go up and unemployment will go down. Unfortunately, decline of transit cargo volumes is bad news for economy. As Russia diverts its cargoes to its own ports, the flow of cargoes through Latvia declines (Latvia’s railway infrastructure has experienced 17% cargo volume declines this year). It is unlikely that new cargoes will be secured in time to compensate losses. This means employment level in the sector will likely decline. Export volumes will continue to grow, but the decline of transit cargoes will hold down economic growth,» – Kazaks said.
Economic growth is expected to be slow in Lithuania (2%-2.8% annually) and Estonia (1.3%-2.5%). Influence of populism will also rise in Baltic States – it is clear from election results in Lithuania and government change in Estonia. Slow growth and inability to secure reforms aimed at providing production rise will force politicians to look towards more expansive fiscal policy. Latvia’s planned tax revenue rise (around 7%) is significantly ahead of the hoped nominal GDP growth rate (below 5%), according to Swedbank. The government’s planned budget deficit (around -0.6% of GDO) for the medium-term budget of 2018 is unrealistic. The country’s ability to fit within the budget border will depend on the State Revenue Service’s ability to recover more money from grey economy. It is possible, but it will require structural changes for tax policy, as said by the bank’s expert.