The beginning of the year was not particular favourable for the global economy. Nevertheless, global economy continues its slow climb. Following expected minimums at the beginning of the year, oil price has begun to grown once more. This time, it seems the lowest point has been passed – oil price is gradually becoming higher, as concluded in Swedbank’s latest economic outlook.
Inflation is gradually becoming stronger. With that, there is no reason to expect more negative interest rates. In spite of the unexpectedly weak activity across the years, Latvia’s economy is expected to experience 3% growth in 2016 and 2017. Latvia’s labour market is warming up slower than previously expected – economic growth is mainly based on productivity growth. Meanwhile, employment mostly remains unchanged. Summer has yet to arrive for economic growth and the labour market, notes Swedbank economist Martis Kazaks and senior economist Lija Strasuna.
Although global economic growth has been weaker than expected, it is expected that it will gradually speed up. The US Central Bank will raise rates very carefully. The European Central Bank will continue printing money. Interest rates will be negative or close to zero for at least two years. Oil price will grow. Inflation will follow. This is why there is no reason to expect ECB to reduce refinancing rates. Eurozone’s private sector’s crediting gradually increases. Fiscal policy will gradually become more expansive, partially due to the costs related to the influx of migrants, especially in Germany. It is expected that Eurozone’s economy will grow this year and next year similarly to last year – around 1.5% – 1.6%. Global economic growth, on the other hand, may reach 3.2% this year and 3.7% next year, as mentioned in the outlook.
There are many potential risks for economic growth in Europe and the rest of the world. Those risks are mainly related to politics. UK’s possible exit from the EU, continuation of talks regarding Greece’s debt and presidential elections in USA only increase uncertainty. China remains the largest risk to global economic growth, economists predict.
«Our estimates suggest that the oil market will experience a turn and demand will become equal to supply. Overproduction of oil in the world has declined from approximately two million barrels a day to 1.4 million this February. It is expected that supply will no longer exceed demand by the end of the year. With that, oil price will grow significantly in the next couple of years. The average Brent oil price will be USD 43 this year and EUR 61 next year,» – experts say.
According to them, oil price rise will have a big impact on development markets, especially for oil exporters. For Russia, recession will end this year. Slow economic growth will begin in 2017. Russian rouble will grow in value. Nevertheless, it will grow more slowly than the oil price. This is because Russia’s economic growth will be very weak. Support from cheap currency will be necessary. Oil price growth will gradually start pulling inflation in the world up, gradually increasing inflation expectations, offering support and provide more room to maneuver for central banks. Inflation in Europe will come close to 2% in the second part of 2017. Debt burden will also become lighter.
«After the unexpected decline in January, when export value had dropped by 7%, Latvia’s export industry will begin to gradually recover. This will be largely because of better external demand (more stable growth in Eurozone, slow recovery in Russia and stronger rouble), as well as gradual exploration of markets in Africa and Asia. Labour costs in Latvia continue to grow,» – note the bank’s economists.
Creation of new jobs is currently in a state of stagnation. No significant climb in employments is expected in the next couple of years. Economic growth seems too slow to allow enterprises to increase the number of employees. Mostly companies satisfy moderate demand growth at the expense of productivity growth. It is a challenge to find qualified workers, considering that it is harder to employ previously inactive individuals or the unemployed (approximately 30% of job seekers search for work for more than two years). This is why companies continue to invest in equipment and machinery to reduce the number of employees or increase production volumes without increasing the number of employees. The proportion of job seekers has remained the same throughout the last three quarters in Latvia. Nevertheless, as labour supply continues to decline due to the demographic situation, the proportion of job seekers will continue to gradually decline (from 9.9% in 2015 to 8.3% in 2017). The level of activity of residents of working age will continue to grow. It seems wage rise has become slower in Q1, which complies with Swedbank’s previous outlook – gross nominal wage growth around 6% in 2016 and 2017. It still exceeds productivity growth rates, as noted in the outlook.
Latvia’s economic growth outlook has been reduced from 3.3% to 3%. This is because of slower export market growth. More powerful investment growth will be put off for a later time following delays with the realization of finances provided by EU funds. On the other hand, positive corrections are possible due to more powerful crediting and investment cycle, especially in 2017. Weak demand on export markets and instability in global economy remain the main negative risks for Latvia’s economic growth, experts say.