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Monday 17.02.2020 | Name days: Konstance, Donats

A look back at the time after the crisis: «pedal to the metal» policy continues echoing in Latvia

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SEB Bank, economy, development, growth, industries, contribution«The negative influence left by the «pedal to the metal» policy has continued echoing in Latvia,» says SEB Bank economist Dainis Gašpuitis, looking back at the years after the crisis.

The period after the economic crisis has been challenging and complicated. It took eight years for the economy to recover to its pre-crisis level, says Gašpuitis.

The economist reminds that the biggest decline of 2009 was observed in Q3 – 15.6%. The decline continued throughout 2010. It did recover gradually, and the recovery started in 2011.

Since 2009 Latvia’s economy has increased 26%. Estonia’s economy has grown 43% and Lithuania’s – 39%.

Over the course of these ten years Latvia’s economy has somewhat lost its ratio in the Baltic economy – from 31% to 28%. Lithuania’s ratio is 45% of the Baltic economy and Estonia’s ratio is 24%.

In 2009 Latvia’s GDP per capita was 52% of the average in the EU and was second from the last. In 2018, on the other hand, Latvia reached 69% of the in the EU. Estonia and Lithuania, for which the crisis went easier, managed to reach 82% and 80%, respectively, as reported by Gašpuitis.

What makes the difference in performance?

«During the crisis stage, export sector reacts and overcomes obstacles the most rapidly. Its importance growth by leaps and bounds,» says Gašpuitis. While exports formed 42.5% of GDP in 2009, they reached 61.3% in 2018. Slightly ahead of Estonia, Lithuania’s export ratio of GDP has grown from 51.9% to 75.6% during this period. Estonia’s ratio increased from 60.5% to 74.3%.

The economist says that over the course of these years, exports of wood processing industry has reached first place, reaching 17.6% of total exports of goods. Exports of electrical appliances are in second place (10.4%), followed by exports of mechanical appliances (5.8%) and exports of spare parts of vehicles (5.6%).

Positions of exports of iron and steel have declined in this period of time, followed by exports of alcohol, the economist says. In Lithuania and Estonia there was a decline in the importance of exports of fuel and oil even though they remain some of the main export goods.

Read also: Seven Latvian companies make it to TOP 50 Baltic businesses list

In Lithuania exports of furniture (11%) take second place, followed by food and drinks (9%), as well as plastic and its products (8%). Compared to Estonia, wood processing plays a major role in exports – 11%.

Exports of wooden houses and furniture are among the leading export goods (8%). Exports of electrical appliances (15%) and mechanical devices (9%) play a more important role in Estonia than in Latvia, says Gašpuitis.

The economist says the biggest added value increase in the last ten years in the Baltics was contributed by trade, transports, hospitality, catering and processing industry.

Development of commercial service played an important role in all three Baltic states – 10% in Lithuania, 13% in Estonia and 11% in Latvia.

The last decade in Baltic households

The lowest unemployment level is currently observed in Estonia (3.9%), followed by Latvia (6%) and Lithuania (6.1%). Over the course of the past ten years wages have grown the most rapidly in Estonia – by 86%, reaching EUR 1 397. In Latvia the increase was 68% – reaching EUR 1 091, and 65% in Lithuania – reaching EUR 1 022.

Since the crisis the volume of household deposits in Latvia has increased nearly five times, reaching EUR 6.6 billion, whereas the deposits of companies have increased nearly four times, reaching EUR 4.2 billion. Meanwhile the volume of commitments of households and companies has declined by approximately 40%.

«This partially reflects the situation with investment activity, which, although increased, remains far behind the pre-crisis level and caution still rules the business environment,» says Gašpuitis.

The volume of deposits of households and businesses in Estonia and Lithuania has increased by more than 100% over the course of the past ten years. In addition, there has also been an approximately 20% increase fir the volume of loans for households. However, the volume of loans in Estonia has increased by 4% whereas in Lithuania the volume of loans has decreased 9%.

What can new conclude?

Gašpuitis concludes that in the past ten years Latvia’s economy has managed to recover and demonstrate good growth trends. In Lithuania and Estonia, the biggest contribution came from processing industry.

«ICT sector has been Estonia’s story of success, which also offers all three Baltic States good development opportunities. Lithuania has successfully refocused and has developed its transport service industry, which could be called Latvia’s southern neighbour’s story of success even though the country is likely to face serious challenges in a longer term,» says the economist.

«The negative influence from the «pedal to the metal» policy has continued echoing in Latvia, because of which the contribution from the construction sector, unlike in neighbouring countries, has been lower. The influence of the crisis will remain for years to come, which only stresses the importance of a sustainable policy,» says Gašpuitis.

«The price for giving in to short-term temptations and benefits has turned out rather large. Could we do better? Definitely. But it is worth to look at what has been accomplished, establish the correct priorities and take on new tasks,» proposes the economist.

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