Latvia’s national economy is slipping because the two big “whales” of the economy – consumption and export – have significantly weakened.
At the same time, the latest data also highlight social inequality, says Līva Zorgenfreija, chief economist of Swedbank in Latvia.
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She believes that the economy is currently being saved from a further decline by the increase in investments promoted by European Union funds.
“Delfi Bizness” already announced that the data published by the Central Statistics Office (CSB) show that Latvia’s gross domestic product (GDP) in comparable prices decreased by a seasonally adjusted 0.3% in the second quarter, compared to the previous quarter. On the other hand, the fall compared to the corresponding quarter of last year in uncorrected data was 0.5%.
“Consumption is shrinking – the high cost of living and the decline in purchasing power are reflected in lower household spending. Food prices in Latvia, after a rapid rise in 2022, were more than 5% higher than the average in the European Union, while the income level in our society is more than 25% behind the European average Therefore, it is no wonder that we see consumers reducing their spending on food,” emphasizes the expert.
“At the same time, CSB reports that spending on the purchase of vehicles has increased. There is a clear trend in first-time car registrations that the registration of new cars is growing rapidly. On the side of companies, this is the result of the recent increase in the value threshold of a representative car. But if we think about the household sector, then the fact that the spending on purchasing vehicles has increased, most probably tells about the great inequality of society. One part of the society restricts food purchases, while another – the new car leaves the showroom,” notes Zorgenfreija.
The good news is that the purchasing power of the average consumer is slowly returning, as wages are already growing faster than prices. “However, we predict that employees will reach the previous level of purchasing power only in 2025. Therefore, consumption could be relatively weak for a few more quarters, and will return to faster growth rates little by little,” says the economist.
There is no improvement in exports – the decline continues. “The story remains the same – along with global trade trends, Latvia’s export of goods is also booming. On the sector side, we can clearly see this in the indicators of the manufacturing industry, which continues to decline. Therefore, it is not surprising that the manufacturing industry was the sector in which the added value fell in the 2nd quarter. the fastest. Mainly this weakness is connected with the crisis of the construction and real estate market in the main partner countries,” says Zorgenfreija.
A quick and rapid recovery in these markets is not predicted, as the development, especially in housing construction, is hindered by the high interest rates of the central banks. “Swedbank” predicts that the reduction of interest rates is expected only in the second quarter of next year.
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“But there are also positive stories,” says the bank’s economist. Exports of services continue to grow, driven by both the growth of air transport and tourism, as well as the increase in exports of ICT and other business services. The strong export is certainly also one of the reasons that helped the ICT sector as a whole to show the second fastest growth in added value among all sectors of the economy.
Zorgenfreija also highlights the fastest growing sector – construction, which, thanks to the inflow of EU funds into the economy, saw growth of 15.4% compared to last year. It also helped the investment volume grow by 5.4%. Meanwhile, other components of investment, such as investment in intellectual property or machinery and equipment, have not grown or even contracted.
GDP data also contain signals about what determines changes in the price level in the economy, the economist emphasizes. “If in 2021 and 2022 the main determinant of the price level rise was the increase in company profits, then this year the main factor is employee wages. In the 2nd quarter, company profits have even decreased compared to last year, while employee wages have continued to grow rapidly. It is expected that in the future, wage growth will remain rapid, but price growth will decrease, as a result of which companies’ profits will suffer.”
2023-09-03 16:20:21
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