Latvia’s gross domestic product (GDP) could grow by 1.4-2.5% in the next year, predicted the surveyed bank analysts.
Līva Zorgenfreija, chief economist of Latvia’s Swedbank, told LETA that Latvia’s economy has been stagnating since 2022, and recovery is not yet expected in the first half of 2024 either.
“Global demand is weak, our main partner countries will not be able to boast of rapid growth in 2024, therefore Latvia’s exports will continue to stagnate. This means that the export-oriented manufacturing industry could still show a decline,” she explained.
At the same time, Zorgenfreya noted that the outlook for domestic consumption and related sectors, such as retail, is more optimistic. Development will continue to be suppressed by the high level of prices, but there is also good news – purchasing power is recovering. Although the unemployment rate will increase slightly, it will still remain very low. At the same time, real wages, or wages adjusted for inflation, started to rise as early as mid-2023 after more than a year of decline, and the recovery will continue as inflation is forecast to be low. However, the previous level of purchasing power will be reached only in the second half of 2024, so household consumption will “run in” little by little.
The construction sector could be one of the pillars of the economy, Zorgenfreija said, explaining that this is because the public investments related to European Union funds and “Rail Baltica” will support construction. On the other hand, from the side of private investments, at least in the first half of the year, we will probably not see a big contribution to the economy – high interest rates force investment projects to be “paused”.
“In general, Latvia’s GDP will grow by 1.4% in 2024. At the beginning of the year, the economy will continue to stagnate, but we hope to see faster growth rates in the second half of the year, when the central banks will have started to reduce interest rates. The drop in interest rates will allow the recovery of private investment activity at home, and, of particular importance to our exporters, the housing market and construction activity in our partner countries as well,” Zorgenfreya said.
Dainis Gašpuitis, macroeconomic expert of “SEB banka”, told LETA agency that the decline in Latvia’s economy in the nine months of this year was 0.6%, so the recession in 2023 will be deeper than predicted at the beginning of the year and will be around 0.4%.
“Complications in the manufacturing industry, exports in general and private consumption burdened by inflation have dragged the economy into recession,” Gašpuitis explained.
At the same time, he mentioned that signs indicate that the activity in the economy may have already reached its lowest point at the end of 2023, but in the next two or three quarters, the activity of the Latvian economy will remain markedly stagnant. “The most important support for short-term growth activity will be the inflowing European funds, especially in construction. Much will depend on the bureaucracy’s ability to ensure their availability. The improvement in purchasing power will gradually revive private consumption, which will be the main driver of growth in 2024,” Gašpuitis said.
Likewise, the macroeconomic expert of “SEB banka” noted that inflation is rapidly decreasing in the eurozone and in Latvia, and this strengthens expectations that the burden of interest rates could be reduced already at the beginning of 2024, providing positive impulses to the economy. This will activate both domestic consumption and demand in foreign markets. “However, I see no reason to bet on rapid improvements, especially in export markets,” Gašpuitis said.
He explained that the prospects for the economies of Germany and the Nordic countries for 2024 are weak. The fall in the export of goods will continue at the beginning of the year, which will gradually stabilize. The export of services has better growth prospects. More pronounced signs of strengthening could appear in the second half of the year. In certain sectors in the manufacturing industry, the situation could remain stagnant throughout 2024 as well. Growth is not expected in the transit sector either. If there are suitable weather conditions, successful results are expected in agriculture.
Also, Gašpuitis predicted that retail trade and services will return to a small growth. Likewise, activity will improve in the real estate and financial sectors.
“The current Latvian growth forecast of 2.2% for 2024 is optimistic. Realistically, if the drop in inflation rates is sufficient for the European Central Bank (ECB) to start reducing the burden of interest rates as soon as possible, we will avoid energy price increases and no new serious challenges will appear. The risk that stagnation may drag on is high,” Gašpuitis said.
Bank “Citadele” economist Mārtiņš Āboliņš told LETA agency that inflation, high prices of energy resources, the drop in real income, weak external demand in the manufacturing industry and the rise in interest rates over the last year have negatively affected the Latvian economy – growth has actually stopped and the economy as a whole is currently in a small in recession.
“Looking into the future, uncertainty remains high and there are many risks to growth, however, I look at 2024 with cautious optimism, and according to my forecasts, a small growth of 2-2.5% is expected in the Latvian economy in 2024,” said Āboliņš.
He explained that one of the sectors in which growth is expected in 2024 could be industry, where production volumes have decreased by approximately 8% since the spring of 2022. With the end of the pandemic, global demand for goods flattened and stockpiles of goods in warehouses increased, thus industrial orders and production decreased. However, there are now signs that the destocking cycle is coming to an end and industry will return to growth in the first half of 2024, although growth is likely to be moderate and uneven.
Also, according to Āboliņš, the situation in trade could improve in 2024. “Inflation in Latvia has fallen below 2%, unemployment is low and wages continue to grow. If there are no significant changes in the labor market, the increase in real income will contribute to the growth of trade. In addition, the financial markets are currently predicting a reduction in interest rates in the Eurozone, possibly as early as 2024. March or April of 2018. According to financial market forecasts, in 2024, interest rates in the Eurozone could be reduced four or five times, while EURIBOR could drop to 2.6-2.8% in December next year. Loans in Latvia are mostly issued with variable interest rates. rates, therefore the reduction of interest rates would also contribute to the growth of consumption,” he explained.
Āboliņš also mentioned that due to the increase in interest rates, the situation in the construction industry in Europe is becoming more and more dramatic and has significantly decreased in recent quarters – the number of building permits and newly issued mortgage loans is decreasing. Also in Latvia, the rise in interest rates reduces activity in the construction industry. Preliminary indicators suggest that construction is likely to fall next year, although this will be partly offset by investments financed by the European Union. Fiscal policy in general is still stimulating, because the budgets of the eurozone countries will also have large deficits in 2024. The year 2024 will also be difficult in construction-oriented industries.
“However, there are also many risks, due to which the cautiously positive forecasts for the Latvian economy for 2024 may not materialize. The war in Ukraine continues, the geopolitical situation in the world is very unstable, China continues to struggle with problems in the real estate sector, while in the eurozone, short-term indicators and the economic mood have worsened. despite the drop in inflation. The energy crisis has not been completely overcome either, and new shocks or unexpectedly high demand due to the cold winter may cause new energy price increases,” said Āboliņš.
He added that the monetary policy on the economy also works with a time lag, and the rapid rise in interest rates experienced over the past year and a half may cause a more significant economic recession than currently forecast, or create financial stability risks due to the high level of debt. Likewise, growth in the eurozone is hampered not only by cyclical factors, but also by structural factors, such as high energy prices and increasing competition in such industries as the automotive industry, which are important for the European economy. As a result, there is a risk that economic stagnation will continue in the Eurozone in 2024, and this will limit Latvia’s growth opportunities.
On the other hand, “Luminor Bank” economist Pēteris Strautiņš told LETA agency that one of the fastest growing sectors next year could be construction, thanks to the faster acquisition of European Union funds. True, the pace will most likely be slower than in 2023, when it was around 15%.
“I very much hope that the development of commercial services, information and communication services will accelerate. The dynamics of these industries was unusually weak in 2023. They are industries that were a reliable source of energy for our economy in the previous years, they are currently experiencing a moment of weakness, but there are prerequisites for faster development in 2024 .due to the very small volume this year, there could also be good growth in the “other industry” sector, which is mainly energy. This sector is unusual in that its overall trend has been downward since 2007, which is not a bad thing at all, it reflects efficiency improvements, thus less energy consumption. Maybe investments in renewable energy resources will make Latvia an exporter of electricity in the future, and energy – a growing industry,” Strautiņš said.
He also predicted that a modest increase (1-2%) in trade could be expected next year, but due to the size of this industry, it should still be considered a significant fact and it would be a big change after about a 5% drop in 2023.
“I expect that there will be close to zero changes in the manufacturing industry next year. There could be a positive development within the year, but at the beginning of the year the inertia of this year’s production reduction will still be felt. The conditions in the commodity export markets will still be quite unfavorable,” Strautiņš said.
He also admitted that the transport sector might not be able to get out of the red. Due to the geopolitical situation, recovery in transit is not expected, it could hinder the development of road transport.
2023-12-21 16:01:34
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