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Wednesday 21.08.2019 | Name days: Linda, Janīna
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Economists predict slowing of growth. Is there a risk of recession?

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The slowing of economic growth rate was expected, but only every other economist admits the index of Q2 of 2019 came as a surprise to them. Other economists look at which industries still have vigour in them and which are able to contribute to economic growth.

«In regards to seasonally unadjusted annual increase data, which is the 2.1%, we can partially calm ourselves with the thought that there were two fewer work days in Q2 then a year prior, whereas Q3 has three more. This could make the general index look slightly better,» comments Luminor economist Pēteris Strautiņš. «Additionally, while in the beginning of the year, when compared to the previous quarter, the seasonally adjusted GDP had dropped 0.1%, in Q2 it had increased 0.8% in comparison to the previous quarter.»

Swedbank economist Agnese Buceniece stresses that although economic growth rate is not as rapid as it was last year, Latvia’s economy continues growing, which is good.

The reason for slower growth rate, according to Buceniece, lies in weaker investment and construction growth, which likely comes at the expense of EU funds, shortage of labour force and weaker external demand.

SEB Bank economist Dainis Gašpuitis calls the drop in economic growth as unavoidable. He does admit, however, that the current slowdown is ‘surprisingly rapid’. The economist admits he was more optimistic about Q2 GDP indexes based on slower decline pace of economic growth indexes in eastern and central Europe.

According to Gašpuitis, growth is currently based on domestic consumption. However, the growth remains sluggish and could potentially become even more cautions, further reducing the growth rate.

Construction and exports holding their breath

Beceniece stresses that the economic confidence index has become slightly worse in recent months. Still, it remains about the long-term index. The biggest decline has been in construction, which happened in response to declining number of orders and overall activity. The confidence of processing industry workers has become worse, as it is influenced by the shortage of labour force and weak demand.

SEB Bank’s expert also expects growth rate to go down in processing industry. However, he stresses that wage rise and unemployment decline will become slower, too.

Swedbank economist expects exporters to see a weakening of growth in partner states and overall demand. Gašpuitis, too, expects slow export growth or even stagnation.

«Development of the external environment will be important as well. Currently there is a shortage of signs to suggest global growth is over. The confidence index continues signalling this. For example, in July the economic confidence index dropped to the lowest level since 2016 (102.7). A slight improvement of consumers’ confidence was not enough to compensate the decline in service, retail trade, construction and industry,» explains Gašpuitis.

Strautiņš, comments that exports of services is Latvia’s main economic engine. Indexes of Q2 in this sector are worse than they were in Q1, but they remain positive.

Risk of recession – minimal

«For the remaining time left in 2019, attention both globally and locally will be focused on hunting for positive news and signals to restore the growth and risk appetite. In spite of the rapidly exhausted contribution, the possibility of recession in Latvia remains minimal,» comments Gašpuitis. «The risk level has increased. This puts more emphasis on the importance of decisions made by politicians, as well as their responsibility over economic and social processes in the country.»

Buceniece predicts economic growth in the coming quarters will remain seated on the shoulders of domestic demand.

«Strong labour market, sustainable households’ optimism and growing purchasing power contribute to the growth of industries focused on domestic consumption. Investment growth, which contributes to high production output and shortage of labour force, continues balancing growth even though at a slower pace than last year. In the second half of the year, export growth could be improved by good grain harvest. At the same time, however, other external factors pull exports down,» allows the economist.

«One major risk for Baltics is the weak Eurozone’s conjuncture and the shortage of nearly all macro-economic tools to stimulate it. While Eurozone continues slowing or showing signs of recession, it is hard to spot any ways to escape this situation. Still, Latvia and its neighbours should not surrender to panic,» comments Strautiņš. «Historically the ties between Baltics and Eurozone’s growth rate have never been very strong. The possible recession in Eurozone may have some influence in the beginning. But as time goes by Latvian exporters will start switching to other markets. Producers from rich European countries will continue relocating activities here, reducing costs or speeding up processes.»


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