Macroeconomic Review of Latvia

Transcription

1 Macroeconomic Review of Latvia July 213 n Focus Latvia will become the 18th member of the euro zone from January 1, 214, according to the final decision by ECONFN on July 9. Following this decision Fitch Ratings upgraded Latvia's credit rating to BBB+ with a stable rating outlook. On the 1 June, the rating agency S&P decided to raise the credit rating of Latvia to BBB+ with a stable rating outlook. This step represents an adequate appraisal of the situation. GDP continues to grow and the weakness of the external environment has not affected substantially the trends which have been solid so far. During the first five months of this year, the profit of Latvian banks amounted to LVL 9.2 million, which is 22.9% more than in the respective period of 212. The total credit portfolio in May, as compared to April, reduced by.4%, or LVL 49 million. n May, new loans in the amount of LVL 194 million were issued, of which LVL 83 million were granted to enterprises, LVL 26.5 million to financial institutions, LVL 18 million to households, and LVL 66 million to non-residents. n May, for the first time since the crisis, the registered number of unemployed in Latvia fell below 1 thousand and reached 9.9%. The Latvian population is being offered a new possibility to make savings savings bonds. Dainis Gašpuitis Macroeconomics Expert Telephone: dainis.gaspuitis@seb.lv Edmunds Rudzītis Socioeconomics Expert Telephone: edmunds.rudzitis@seb.lv A/S SEB banka Meistaru iela 1, Valdlauči Ėekavas pagasts Ėekavas novads LV ww.seb.lv

2 Latvia s key economic data and forecasts GDP growth (%) GDP at current prices (mln LVL) Consumer prices index (% annual average) Fiscal deficit, surplus of the Government consolidated budget (ESA 95, % of GDP) Current account balance (% of GDP) Foreign direct investment flow (mln LVL) Cumulative foreign direct investment (mln LVL) Foreign trade balance (% of GDP) Government foreign debt (mln LVL) Manufacturing output (% yoy) Retail trade turnover (% yoy) Unemployment rate (%, end of period) Job seekers rate (%, end of period) Average gross salary growth (% yoy) Real wage and salary index (% yoy) f 214f V V V V 6.9 V Standard & Poor s long-term credit rating BB+ BB+ BBB BBB+ - - * Provisional data. Sources: Central Statistical Bureau of Latvia, the Bank of Latvia. SEB banka s forecasts. The Baltic economies still on their way to a pre-crisis level Despite recognised growth in the Latvian economy, making it the economy with the fastest growth in the EU, its success, if compared to Lithuania and Estonia, is still relative. Recovery is taking place in all three Baltic economies, but in Latvia it started from a lower level; hence the better performance. t is Lithuania, not Estonia, which is closest to its pre-crisis level; Lithuania falls behind that level by 2.3%, while Estonia by 4.9%. The Latvian economy, which falls behind the pre-crisis level by 12.2%, is the farthest behind. This can be explained by the fact that the Latvian economy was in recession for three years, the Estonian economy for two years, and the Lithuanian economy for only one year. The depth and duration of the recession depended, to a large extent, on the scale of overheating of the economy and other sidefactors, as a result of which the situation in Latvia was highly dramatic. After a two-year spurt, this year the growth rate in Latvia is expected to be a little lower than 212, that is, 3.5%. Next year, the growth might accelerate to 4.8%. The growth rate of the Lithuanian economy will also slow down this year. Growth will 2

3 continue to be supported by the powerful export sector. The increase of food export volume in eastern, and especially Russia s market, has a more promising outlook. However, the weakening of growth in Russia could slow down the potential rise. However, more support is expected to come from domestic consumption. A slight increase in activity is expected in 214. Domestic consumption, maintained competitiveness and EU Funds are among the key privileges of the Estonian economy. Despite the fact that growth forecasts for this year are in line with what was achieved last year, poor performance in the first quarter, weakening growth in Russia, and a recession in the Finnish economy show that this year growth might weaken and fall below three percent. The year 214, when growth may speed up to 3.7%, promises a more positive outlook. Baltic growth forecasts GDP changes f 214f Latvia Lithuania Estonia Source: SEB 1 GDP (%,Y-o-Y) Latvia Estonia Lithuania 15 GDP index (1=27) Lithuania Estonia Latvia V 12 V Data: Nat. Stat. Bur Data: Nat. Stat. Bur. Latvia: Temporary slow down As could be expected, in the first quarter the Latvian economy continued to steer towards growth. However, considering the achievements of the last two years, reaching new heights under the conditions that dominate the global economy is ever more complicated. Thus, in the first quarter of 213, as compared to the same period in 212, the growth rate has dropped to 3.6%. Even though the situation in export markets is not very favourable, there has been no sharp drop in the growth rates of the Latvian economy thanks to the positive effect of increasing activity in the domestic market on GDP growth. EU Funds provide large support. n the first quarter of the year, private consumption was the key driver of economic growth; during the year, it increased by 4.7%, thus ensuring the total increase of GDP by 3.4 percentage points. Private consumption is driven by the improvement of the situation on the labour market, an increase in the number of the employed and an increase in the income and purchasing power of the employed as well as by cautiously optimistic expectations among consumers regarding the future financial situation. Both the increase of the population s income and improvement of public opinions, as well as tourism continue to support trade, which provided the largest 3

4 contribution of all the sectors to the GDP increase in the first quarter of the year (1.5 percentage points). Positive trends can also be seen in the construction and real estate sectors. n the first quarter of the year, negative trends were observed in the processing industry, and, considering the problems with Liepājas Metalurgs and low demand on global markets, no positive news about the overall growth in the industry sector can be expected in the second quarter. Challenges in global economy centres maintain a high degree of uncertainty, and for this reason, investment activity may remain comparatively low. Similar trends will also dominate in the following quarters of the year. Latvia, which has previously managed to face the effects of external factors, will continue to depend on the recovery of the economies in the region. At the end of the summer it will be possible to assess its success and the consequences for Latvia, that is, whether the economy slows down even more or growth speeds up. Overall, the increase of activity alongside with the stabilisation of the entire region is expected in 214. Even though this year the economic growth rate in Latvia will be slower, it will be comparatively better than in other EU countries. The expected GDP increase is 3.5% this year and 4.8% in the following year Q2 Q3 Q4 13 TOTAL Data:CSB (F) Construction (C) Manufacturing (G) Trade (L) Real estate (MNS) Commercial services GDP by sectors (%, quarters, Y-o-Y) (H) Transportation and storage (J) nformation and communication (P) Education (A) Agriculture, Forestry () Accommodation, food service (Q) Human health and social work (O) Public administration (K) Financial and insurance sec. (R) Arts, entert. and recreation Growth allows for a reduction in the budget deficit When calculating in accordance with the methodology of the European System of Accounts (ESA), the public budget deficit in 212 was LVL million, which equals 1.2% of GDP. At the same time, the government s total debt in the last year increased to LVL 6.31 billion; yet fell as a percentage of GDP from 41.9% in 211 to 4.7% in 212. The budget implementation data and the ability of the economy to maintain the development rate showed throughout the year that the budget deficit will turn out to be less than was initially expected. As far back as in 211, when drawing up the budget, there were forecasts that the budget deficit would be 2.5%, which was later adjusted to 1.9%. Favourable changes in GDP to which both the deficit and the debt, which in the actual prices in 212 increased by 8.7% and reached LVL billion, are referenced, paved the way to exceeding these expectations. This year s budget deficit will, most likely, remain at its previous year s level, i.e. 1.2% of the GDP. The pressure to increase spending continues to grow and elections are also near. Therefore, in individual cases, the government might be less restrictive with respect to spending. Moreover, there is no longer any concern about the fulfilment of the inflation criterion. The main role in the implementation of the budget is played by the economic growth rate, which is slowing. The growth prospects of the global economy and of most countries in the region have recently shrunk, which might provide an additional argument in favour of the government s availing itself of additional funds for investments. The necessity to intervene in the saving of Liepājas Metalurgs might pose difficulties for the budget. As a result, the government might not be eager to be ahead of the schedule to achieve the budget deficit of.9% until 216. The budget deficit, as stated in the Law on the State budget for 213, is 1.4%. 4

5 Meanwhile, the debt relative to the GDP will continue to decrease. n this context, it is essential to maintain the predictability of economic policy. t is gradually paying off, since the price at which Latvia is able to refinance the debt has dropped and could continue to improve. At the end of May of this year, the consolidated total State budget surplus increased up to LVL million. The surplus in the basic budget was nearly LVL 14 million, while the deficit of the special budget was LVL 2.4 million. During the first five months of the year, tax revenues exceeded by LVL 13.7 million or 7.4% of the level in the same period in 212. Most of the increase was due to an increase in labour tax revenues. Corporate income tax revenues increased by LVL 21 million, or 2.9%. General government debt (% to GDP) Government budget (mln lati) Expenditure 212 Rev enues 212 Balance 212 Expenditure 213 Rev enues 213 Balance 213 V V V V V X X X X Data: Treasury Current account under control n the first four months of the year, the current account (CA) deficit of the balance of payments (BP) was LVL 26 million only, which is 84% less than in the same period a year ago. Overall, living within one s means is a very good thing; however, the trends which can be observed show that the economy functions with a limited capacity and with caution. The small CA deficit depended on several factors. During this period, the balance of goods improved, with an increase in exports exceeding that of imports. The limited increase of imports indicates that caution dominates the plans of entrepreneurs. The balance of services also improved slightly. CA also allowed the reduction of the income account deficit to improve, the positive effect of which should rather be viewed as a negative sign. First, the BP shows that the profit of non-resident enterprises is reducing slightly. Second, bank interest payments have decreased. This, despite having reduced the outflow of cash from Latvia, indicates a reduction of the total credit portfolio, thereby also limiting future prospects. A slight improvement can also be observed in the current transfer account, which is affected by the fluctuating character of incoming EU payments Balance of payments (monthly data, mln lati) 11 V Current account Services Current transfers V X X 12 V Goods FD in Latvia V X X 13 Data:BoL As can be seen from the BP capital account, direct foreign investments continued to flow into Latvia. An increase can also be observed in equity capital investments. Meanwhile, there was a reduction in reinvested profit, partly due to dividend pay out effects, 5

6 as well as investments in other capital. Contrary to the positive balance in the amount of LVL 123 million last year, during the first four months of this year there has been a deficit of LVL 28 million in the other investments account. This is a result of two key factors, namely, enterprises are reducing debt obligations by returning funds to non-residents, and bank deposits in foreign countries and/or loans to non-residents have increased. Considering the economic trends, no significant changes in the BP can be expected in the next few months. With the disappearance of uncertainty in the external environment and stabilisation of internal confidence, the BP balance, which reflects the relationship between Latvian residents and non-residents will worsen, as willingness to invest and consume will increase. Nonetheless, the extent of the unbalance will not reach the level observed before the crisis. Different trends in the industry sector n May, as compared to April, industrial production increased by 2.2%. f compared to May of 212, industrial output increased by.6%. This positive trend was due to growth in the mining industry and quarrying (+1.3%), and power and gas supply (+3.9%). A reduction, though slight, was observed in the processing industry (-.2%). Problems with Liepājas Metalurgs were the major cause of sector decline and metal production volumes have dropped by 68.2%. Production related to the ship maintenance and boat service, which is subject to major seasonal fluctuations, also showed a reduction (-16.1%). The reduction in pharmaceutical manufacturing (-5.1%) is to be viewed with caution, as the overall prospects of the sector in export markets are still favourable. A very sharp increase was observed in electrical equipment (+16.7%) and furniture manufacturing (+17%). Several other sectors were equally successful. During the first five months of the year, production volumes have dropped by 1.6%, and the situation in the industry sector is no longer as brilliant as it used to be a year ago. On the other hand, it is not desperate either. The drop in the first five months was mainly due to problems connected with bio-fuel production and Liepājas Metalurgs as well as to the fluctuating character of the provision of services related to shipbuilding. Liepājas Metalurgs will, most probably, have a negative effect on the performance of Still remarkable export performance This year, the external trade performance has remained remarkable. During the first four months of the year, export volume increased by 1.3%, which is well ahead of the 3.1% growth of import volume. The steady increase of the export volume is a positive sign, this entire year. n case a successful investor is attracted, any meaningful resumption of activity could only take place in the next year. Meanwhile, the ship building and service indicators may quickly jump to positive if certain orders are received. At the same time, sectors, such as electrical equipment, furniture, computer and hardware, clothing and food production, continue to develop successfully. Competitiveness is still being reflected in export indicators and will continue to boost overall indicators despite an unstable external environment. Therefore, the situation will continue to be uneven, and towards the end of this year the processing industry might show slightly positive results and end the year with a slight increase of.8% Changes (%, Y-o-Y) ndustry Manufacturing 12 V V X 13 V as it demonstrates operational competitiveness; however, it has to be noted that the promising data also include the re-export effect. t can be expected that in the next months, the export volume will continue to grow. A good balance of trade in Latvia 6

7 still remains the long-term objective; yet slow import growth is cause for concern. This, to a certain extent, justifies the high degree of caution among entrepreneurs, which slows down investment plans; in the short term, this has a positive effect on both the balance of trade and GDP growth, yet in the longer term it may affect growth potential. Therefore, irrespective of the ability to increase export volume, import patterns should be followed as well. Currently they are characterised by the caution which can still be observed among entrepreneurs. The pressure of costs to inflation will increase n June, as compared to May, the consumer price level raised by.2%. This was mainly affected by the increase in the prices of food products and a reduction in the prices of clothing, footwear and alcoholic beverages. t has to be noted that the prices of recreation and culture services have increased rather sharply (+.8%), which indicates the activity of demand in this segment. As a result, after being negative for two months, annual inflation has risen once again above zero and was.2% in June. The key factor affecting inflation was the increase in food product prices. The reduction in fuel prices and telecommunication services was the factor which brought inflation down. n the next few months, the rise of inflation will be more rapid due to the base effect, i.e. the effects of the VAT reduction introduced in the previous year will disappear. On the other hand, starting with July, the prices of natural gas and heat energy will decrease. The prices of food products will continue to increase gradually. As a result, this year s average inflation could be.5%. n the following year, more rapid price developments can be expected, and inflation will be close to 3%. This The number of job-seekers decreases n the first quarter, economic growth continued to decrease the number of job-seekers. During the period, there were thousand job-seekers, which is 34.8 thousand less than in the respective period a year before. Relative to the number of active workers, the level of unemployment was 12.8%. What is of most importance with regard to these trends is not only the reduction of unemployment, but also the fact Foreign trade by months (%, Y-o-Y) Export mport Saldo V V X 11 V V X 12 V V X 13 V -22 will be driven by rising pressure to increase wages and the expected increase in electricity tariffs for households. The introduction of the Euro will also play a role. The question of the effect of external factors is still unanswered how global economy growth will accelerate, including the recovery of the Euro zone, and how the global commodity markets will react to the planned restrictions of monetary stimulus Annual Monthly Consumer Price ndex (%) V V X 11 V V X 12 Annual average V V X 13 V Data:CSB that during the year, the non-active population has also decreased, although slightly. n many places, unemployment increases due to the fact that people leave the labour market. n Latvia, the number of the people who have lost any hope of finding a job is rather large at 33.7 thousand or 6.2% of all the nonactive population. These are the potential participants of the labour market whose involvement will be 7

8 required from both a social and economic point of view. Since future growth will remain uneven, the issue of population mobility will be very important. Restrictions on the availability of the labour force in the more active regions of Latvia will become more apparent, but, at the same time, there will be regions where unemployment will remain very high. Overall, Latvia continues to move in the opposite direction to the Euro zone, where unemployment indicators continue to rise and have yet to peak. t is expected that this year, unemployment will continue to decrease, and soon the unemployment indicator in Latvia could fall below the average observed in the Euro zone. However, the slow-down in growth might manifest itself in more moderate trends in labour market. Future indications of the continuation of domestic consumption growth allow for expectations of greater job prospects in the services sector. Unemployment rate by age groups (thousands) V 1 V 11 V 12 V 13 The consumption boom continues n May 213, the turnover of retail establishments increased by 2.6% within a month. n annual terms, retail turnover increased by 8.%. As usual, food product sales grew more slowly (+2.9%), while the sale of non-food products increased by 11.7%. The warm climate and lower prices promoted fuel sales, which increased by 16.7% during the year. The most rapid increase of turnover in May was in furniture, lighting equipment and household appliance retail sales (+45.4%). The same rapid increase for the fourth month in a row can be observed in sales of electrical equipment. A rather impressive growth rate was observed in May in the sales of textile articles, clothing and footwear (+23.2%). Despite a slow-down in the growth rate of the economy, the consumption boom continues. The comparatively favourable situation, or low inflation, and the increase in wages as well as tax reductions, which has a positive effect on the purchasing power of the population, keeps the boom going. The overall sentiment continues to be rather optimistic; it lags behind the peak level of 26, yet remains steady at the level reported in the summer of 28. n the first quarter, the net wage has increased n the first quarter of 213, the average gross wage increased by 4.2% at almost the same rate in the Retail turnover (%, Y-o-Y; constant prices) Total Food Non-food 11-5 V V X 12 V V X 13 V Favourable weather conditions and tourist flows also play a certain role. Despite conditions in the global economy, including those related to the climate, comfortable conditions in Latvian consumption will remain in the following months. The willingness of the population to spend will pave the way to maintaining economic activity. However, taking into account these risks of instability, it should be useful to consider alternative forms of spending which would bring more return in the future, including the idea of increasing savings. public and the private sectors. Thanks to the reduction of the personal income tax (PT) by one 8

9 percentage point, the increase of the net wage, or wage on hand, was more rapid than that of the gross wage. During the year, the average net wage increased by 5.2% to LVL 35. With inflation remaining low, the increase of the net wage has resulted in a more pronounced increase in the purchasing power of the employed. Considering the effects of inflation, the actual wage in the first quarter, as compared to the first quarter of 212, increased by 4.8%. With the reduction of the PT rate, a larger number of the employed feel the increase of the wage; moreover, the expected increase in relief for dependent persons by LVL 1 starting 1 July will also have a positive effect on the purchasing power of the employed, thereby slightly increasing the income for families with children. n terms of percentage, the employed with a small income and with two or more dependents will benefit most from this relief. For example, for a person whose gross wage is LVL 35 and who has three children, the increase of relief for dependents by LVL 1 in the second half of the year will increase that person s net wage by LVL 2.4. This year, the average increase of the gross wage may be around 4.5%, while the percentage of the average net wage, as a result of the reduction of the tax burden for the labour force, will increase more rapidly. Taking into account low inflation, this year the purchasing power of the employed might increase by 3.9% Wages and Salaries (%, Y-o-Y) Bruto Neto Real The increase of the birth rate will not halt the reduction of the population to less than 2 million Despite the slight increase of the birth rate in 212, the population in Latvia continues to decrease. According to the Central Statistics Bureau data, in January of this year there were 2.22 million inhabitants, which is 2.5 thousand less than at the start of 212. The population reduction is caused by both the negative natural increase of the population and migration. Last year, the number of deceased persons exceeded the number of newborns by 9.1 thousand, while the number of migrants exceeded the number of the immigrants to Latvia by 11.4 thousand. The data show that the wave of emigration is gradually slowing, but the number of residents leaving the country is still comparatively large; moreover, those who leave are of younger. Last year, 19,897 children were born, which is 1.1 thousand more than in 211. Yet, this is still less than the annual number of newborns during the period from 22 till 29. During the first five months of 213, the number of newborns reached 8,21, which is 2.1% more than in the respective period of 212. t is possible that in the second half of the year, similar trends will also be observed and that this year the number of newborns will be larger than last year. Moreover, the level of 2 thousand could be exceeded again. At the same time, despite an increase in the birth rate, the number of newborns will still be less than that of the deceased. Hence, the natural increase of the population will remain negative this year. Migration activity will determine whether, in early 214, the population will fall below 2 million. Unfortunately, this will become a reality in 215. Last year, the share of second and third-born children in the total number of newborns continued to increase in 46.3% of the cases the newborns were the first child in the family, while in 36.3% and 12% of the cases the second and third child, respectively. Similarly, the average age of women giving birth to their first child continued to increase. n 212 it was 26.6 years; one of the reasons for this is the effect of the crisis, when a certain portion of women postponed the decision to have children until the economic situation becomes more stable. n recent years, the total fertility rate (the mean number of children born to a woman during her lifetime based on current age-specific fertility rates) increased again. Thus, in 211 it was 1.34, while in 212 it surpassed 1.4. This rate still lags far behind the 9

10 rate of 2.1 that is needed for a normal demographic renewal. Therefore, in order to reach a normal demographic renewal, the number of newborns in Latvia should increase substantially. A complex support system for families with children should incentivise the growth of the birth rate, and greater support with fiscal measures should be achieved, for example, greater personal income tax relief for dependents (children) and an adequate and efficient support system, such as infrastructure, working conditions which are favourable for new mothers, kindergartens, etc. A positive, birth-rate stimulating campaign in the country is also certainly needed Natural increase ,2 2, 1,8 1,6 1,4 1,2 1, Total fertility rate SEB banka 212 This edition is intended for general circulation only and does not constitute a personal recommendation. The information in this document was obtained from sources believed to be reliable, but its accuracy or completeness cannot be guaranteed. Any opinions expressed herein are given in good faith, but are subject to change without notice. 1