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Monday 25.09.2017 | Name days: Rauls, Rodrigo

Swedbank: Latvia should carry out painful reforms

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Author: LETALatvia is at the crossroads once again. Even though the overblown unbalance of the economic bubble era is long gone and economic growth is once again balanced, Latvia still has much to do.

If Latvia does not carry out definitive, quality and long-lasting reforms in the near future, the pressure of expenses on the general competitiveness will start growing very soon. The reduction of competitiveness would delay economic growth and will threaten the long-term development of Latvia’s economy and the social sector, Swedbank economists note.

Latvia has demonstrated a rapid economic growth in the last few years. How can the country’s economy continue to develop, when the EU, one of the most important export markets, is going through declines? Economic development is cyclic in its nature. Business cycles in different countries are far from being equal. Nevertheless, the painful austerity acts have now paid off – Latvia’s recovery has been more rapid, stable and moderate than that of many other countries. Everything Latvia did several years ago is now being done by other countries hit by the crisis, stated in the latest economic outlook of Swedbank.

According to Swedbank economist Lija Strasuna, Latvia, Lithuania and Estonia will remain the leaders of economic growth in the EU in the next couple of years. However, the difference in growth rates could reduce rapidly. Realization of reforms requires time, but their results also only usually seen after a few years. If no reforms for the increase of Latvia’s economic potential are carried out in the near future, the progression toward the level of developed EU countries will be too slow for Latvia to retain its workforce.

Financial market moods improved at the beginning of 2013. In spite of the rise of the Cyprus crisis, it was relatively calm. The weakest economies will continue to reduce their obligations and will increase their competitiveness a little. The largest central banks of the world will continue their expansive monetary policy. Nevertheless, some challenges still remain, and political decisions continue to be unstable: the fiscal problems in USA are being solved at the last minute, the chaos with the outcome of elections in Italy, the conflicting agreement about providing aid to Cyprus and other recent events do not contribute to stability and do not increase faith in the ability of politicians to make quality decisions, she adds.

In spite of all this, the global economy continues to grow. The general global economic growth is expected to be at 3.1%. However, the situation is far from simple. Germany and China are expected to have a more rapid development than previously projected, while Russia and Southern Europe are expected to slow down. The global economy will increase its development speed to 3.7% in 2014, which is still below its potential. In 2014, Eurozone’s recovery will be more expansive, with no small thanks to Germany. The possibility of a negative scenario, however, is 20%, while that of a positive outcome is 15%.

Latvia’s development model is still directed for export. Given the still weak external demand and the growing competition in the foreign markets, the rise of Latvia’s export will be slower this year. Investments of enterprises will only yield results after some time. Competition will make market expansion more complicated, but as long as the situation in the world recovers, export growth will be largely provided by growing demand.

Latvia’s GDP outlook has been increased to 4.3% for 2013 (previously 4.1%). Export dynamics exceeded expectation at the end of 2012 and the beginning of 2013. This is why export outlook has been improved for 2013.

Inflation of consumer prices was unexpectedly low in the first months of 2013. The reason for this is the beneficial progress of global prices on raw materials and the very weak pressure of domestic factors. This is why Swedbank economists decided to reduce the outlook of the average growth of consumer prices for 2013 to 1.1% (1.9% previously). Global prices on food and oil products are expected to be stable, so prices on fuel, gas and central heating services should not change significantly in Latvia.

The weak influence of domestic factors on prices can be explained by the fact that the economy has yet to use its full potential (capital and workforce). The difference between the actual and potential GDP remains negative. The gap is expected to fade away in the next couple of years. This will increase the effect of domestic factors on prices.

According to Swedbank economist Martins Kazaks, the upcoming elections could bring about slight corrections to economic expectations, but the bank does not expect there to be any problems with unreasonable government expenses in the next couple of years. According to the economist, the real challenge is using the money for well thought through goals, not merely “eat” the money. As long as there are no reforms in the budget, there will be nothing done in practice, Kazaks concluded.


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