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Monday 17.02.2020 | Name days: Konstance, Donats
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Swedbank predicts 2.2% economic growth for Latvia in 2020

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Swedbank, outlook, economic growth, changes, ECBLatvia’s national economic growth in 2020 will rely on private consumption. Overall growth is expected at 2.2%, according to Swedbank chief economist Liva Zorgenfreija.

The expert predicts economic growth to bloom closer to the second half of 2020 and that a conditional recovery is also expected next year. Nevertheless, negative risks for global and Latvia’s economy remain high this year.

«Latvia’s economic growth concluded the last decade with a not very encouraging growth rate. Although short-term data points to a stabilization of the situation in the world, outlooks suggests that neither the world not Latvia is expected to have a rapid economic breakthrough at the beginning of the new decade,» says the economist.

Consumption to steer domestic demand

Zorgenfreija notes that although economic growth had slowed down last year, this was not apparent on the labour market. Entrepreneurs felt that shortage of demand last year had a strong slowdown effect on business development. Nevertheless, labour force shortage remained high. Both this and the fight against envelope wages had assisted with wage growth, especially in the private sector.

The economist predicts that wage growth will slow down because of weak economic growth. However, it will remain rapid – 6.5%. Unemployment is expected to stay around 6.3%.

Moderate inflation (2.4%) will improve actual purchasing power. Inflation will be steered by excise tax rise and still slowed by reduced prices for certain utilities, the bank predicts.

«Generally the welcoming labour market, high and even growing mood of consumers and moderate inflation point towards sustainable growth in private consumption,» says Zorgenfreija.

Still 2020 is expected to have slower development of investments, according to Swedbank outlooks.

«It is likely that the highest point of European Union structure funds financing is in the past. This is why we should not expect any additional backing for investments. Private investments will influence the mood of businessmen, which, though suffered a dip last year, remain above the average long-term level. Construction sector’s rapid growth rates will also drop through. Large-scale investment projects expected in relation to Rail Baltica will improve investment contribution in the coming years,» explains Zorgenfreija.

Weak global growth will slow development of Latvia’s exports

US-Chinese first stage trade agreement, as well as greater clarity in Brexit process, has helped improve the global trade picture for a short while, Swedbank explains.

At the same time, the bank predicts the economy of partner states will grow slowly in 2020, and GDP growth of Latvia’s closest neighbours – Lithuania and Estonia – will decline rather rapidly. Latvia’s export growth will remain uncharacteristically low in 2020. However, as global economic rate becomes livelier, a more rapid export contribution is expected in the second half of the year, the bank predicts.

Swedbank reminds that for the first time since 2016 at the end of 2019 export-focused processing industries had experienced output decline. The bank predicts that both demand and price decline will continue causing problems for wood-processing industry.

On top of that order decline in metal-working industry suggest to the bank this industry may experience problems in the near future.

Meanwhile, investment growth into food production suggests opportunities to explore the export market in the future.

Nevertheless, Swedbank does not expect any rapid growth rates in the processing industry.

Exports of services are predicted to be sustainable and remain important for business, IT and telecommunication services’ contribution. Decline of transits and Mobility Package’s reduced land carriers’ competitiveness will limit exports of transport services on the European markets. Structural changes in the finance sector do not offer hope for any contribution of this industry’s services for exports, the bank explains.

Swedbank predicts relatively slow growth for the next quarters with some bloom in the second half of the year.

In spite of weak exports, the consistently strong private consumption will maintain growth at 2.2% in 2020. Next year growth of the export market is expected to improve. The same can be said for rapid growth of real purchasing power, thereby ensuring 2.7% economic growth.

Risks at the margins remain notable

In recent months there has been a rise for optimism in the world. However, risks remain serious, Swedbank concludes.

Risks may increase further by the end of 2020, considering presidential elections in USA and the lack of clarity with Brexit transition period. The beginning of the year reminded that geopolitical risks can increase at any moment, says Zorgenfreija.

Even ECB policy is on the eve of changes because president Christine Lagarde has ordered re-assessment of the strategy. Sharp changes with ECB policy would increase the confusion with already nervous finance markets, the economist says.

Read also: Swedbank: Latvian households’ financial situation assessment the highest since 2013

Swedbank predicts structural changes of the finance sector will have a lasting positive effect on Latvia’s image in the eyes of investors.


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