Investment activity has been unexpectedly week at the beginning of the year. Because of this, Latvia’s GDP growth outlook has been reduced to 2.1%. In spite of the decline in investments, the number of employed people continued to grow bit by bit in the first half of the year. The same can be said about wages and expenditures of Latvian households.
Although GDP is significantly lower than the government had previously expected, tax revenue fits the plan. With that, the budget situation is stable. Populism and geopolitics remain a source of worry. Nevertheless, the global economy continues to grow, giving Latvian exporters the opportunity to grow and earn money. Along with the inflow of structural funds and more active investment environment, Swedbank predicts Latvia’s economy will grow 3.0% in 2016. If the banks’ loan portfolios grow some more, Latvia’s economic growth may reach 3.3% in 2018.
The world’s economy is currently characterized by unequal and rather slow growth. GDP growth rate is expected to exceed 3% in the next couple of years, which is slower than previously expected. Economic growth of USA and Germany will become slower. This is because the business cycle in those two countries is approaching its maturity phase. Eurozone’s growth rate will remain around 1.5% annually, but with major differences among countries: Spain will grow 2-3% and Finland’s growth is expected to be 1%. With lower budget expenditure support, Sweden’s growth will drop to 2-4% growth. Consumption and housing sector will remain Sweden’s main economic growth powers. Brexit will impact UK’s economy. Nevertheless, support from British banks will likely help avoid a recession. Because of that, UK’s economy will continue to grow. Russia’s recession has ended, but the country’s economic recovery will be weak – oil prices will grow moderately, but the role of the state in economy is too big and too heavy to allow other sectors to experience major economic growth. China’s economy will continue growing 6.5% annually. Economic growth of 7% is expected in India, notes Swedbank head economist Martins Kazaks.
Central banks maintain supportive monetary policies. Slower economic growth also means slower balancing of interest rates.
Populism, political instability and geopolitical risks are the Achilles’ heel that could potentially lead the world economy into a very bad scenario. In the next couple of years the world economy will often come at a crossroads, where a single mistake will mean a serious blow to economy. This includes the presidential elections in USA in November 2016, presidential and parliament elections in France in 2017. The possibility of a negative scenario is 25%. The possibility of a positive scenario is 15%, says the bank’s expert.
The main factors that could impact Latvia’s economic growth in a negative way are external – weak EU economy, populism and geopolitical uncertainty. Latvia’s economy could grow significantly more than the expected 3%. The main potential is internal – more optimistic mood among businessmen and households. With that, it is expected that there will also be more active loan activity.
Weak investment activity and construction crisis is largely due to delays with EU funds. It is not, however, the only reason. Milk prices remain low – it is hard for milk producers to survive, let alone invest money. Studies concerning the processing industry mention the lack of demand as the biggest obstacle for production output growth. According to Kazaks, many companies are too careful.
«The construction industry is expected to experience the most problems this year. The number of people employed in this sector has already declined by nearly 10,000 in comparison with 2015. This has not had a big impact on the labour market, however. This is because the total number of employed people has increased slightly. It is surprisingly good! The level of unemployment is slightly higher than was previously expected. Nevertheless – it continues to decline. Wage growth has become slower. It remains within our predicted 5-6% border. We expect there to be growth in the next couple of years as well.
Following a recovery of the construction industry, unemployment is sure to decline. This is because low-qualified workers can become employed in the construction sector. Survey results of European central banks’ loan service accessibility points to an increase in demand for loans. The interest of households towards loans remains low. It is unlikely that we will see any improvement in this area sooner than 2018,» – says the economist.