Latvian Macro Monitor April 2017 2A, Republikas Square, Riga LV-1010, Latvia Tel. +371 67010827, Fax +371 67010191; www.citadele.lv Martins Abolins Economist Treasury Martins.Abolins@citadele.lv Summary Economic growth continued to accelerate in Latvia in Q1 as GDP grew by 1.5% compared to previous quarter and as a result, annual GDP growth reached 3.9%. Acceleration of economic growth in Latvia started already at the end of 2016 as improving external economic environment as well as economic recovery in Russia led to pick up in exports and manufacturing. Retail trade in Latvia had one more disappointing month in March as retail trade grew by only 1.5% y-o-y while due to higher inflation nominal retail trade turnover grew by 5.9%. Manufacturing in Latvia continues to benefit from favourable developments in global economy and improvements in world trade and as a result in March manufacturing output grew by 7.4%. Increase in inflation begun to stabilize in March as annual inflation reached 3.4% which is only 0.1% higher than in February. Compared to previous month consumer prices rose by 0.9% in March although this is mostly due to seasonal factors. After prolonged delays to the start of the new EU fund programming period EU funds are finally beginning to flow into economy as government investment expenditure grew by 41.3% y-o-y in Q1. At the same time overall general government spending remained subdued as expenditure excluding interest payments grew by only 1.2%. In Q1 Latvian export sector had the best quarterly growth since 2013 as strong export growth continued also in March and Latvian goods export rose by 13.2% compared to previous year. At the same time in March imports rose by 15.2% leading to slight increase in trade deficit mainly as a result of higher oil prices as well as one-off investments in transport sector. GDP Economic growth continued to accelerate in Latvia in Q1 as GDP grew by 1.5% compared to previous quarter and as a result, annual GDP growth reached 3.9%. This the fastest pace of economic growth in Latvia in more than 4 years as Latvian economy is beginning to recover from Russian sanctions, declining transit volumes, drop in construction due to delays in EU fund investment and problems in agriculture sector that had dragged down overall economic growth in previous 2-3 8% 6% 4% 2% -2% GDP growth, % y-o-y EU-28 Estonia Latvia Lithuania Source: Eurostat, CSB, Lithuania statistics 2011 2012 2013 2014 2015 2016 2017 1
years. The same external factors are benefiting not only Latvia but also wider Baltic regions leading to a synchronized pick up in GDP growth in the Baltic countries. Acceleration of economic growth in Latvia started already at the end of 2016 as improving external economic environment as well as economic recovery in Russia led to pick up in exports and manufacturing. As a result in the first months of 2017 industrial output grew by 8.7% while export of good rose by 9.3% and export of services by 12%. Meanwhile domestic consumption remains relatively weak as growth in retail trade and a number of service sectors did not exceed 2-3%. However, delayed EU financed investment is finally beginning to flow into economy as construction expanded by 8% y-o-y in Q1 and public sector investment grew by 41% while overall construction volumes still remain below 2014 and 2015 levels. Retail trade Retail trade in Latvia had one more disappointing month in March as retail trade grew by only 1.5% compared to previous year while in Q1 retail trade growth averaged 2. as overall domestic demand in Latvia remains relatively weak. At the same time due to higher inflation nominal retail trade turnover grew by 5.9% in March as retail trade dynamics in Latvia continue to lag behind Lithuania and Estonia. 15% 5% -5% - -15% Retail trade turnover, % y-o-y and contribution Non-food Food Fuel Retail trade total Source: CSB; Citadele calculations -2 2010 2011 2012 2013 2014 2015 2016 2017 Pickup in inflation has led to higher spending on food product and fuel which has had a negative impact on sales of pharmaceuticals (- 2. y-o-y), clothing (-2.2%) and some durable goods and could be one of the reasons behind drop in consumer confidence at the start of the year. At the same time overall trends in retail trade remain broadly unchanged as food sales (-1.1% y-o-y in constant prices) continue to stagnate due to adverse demographics while sales of non-food items grew by 2.6%. At the same time fuel sales grew by 12.2%. Biggest surprise in Match was online shopping which grew by only 5. y-o-y and which is the slowest rate of growth in online retailing in more than 5 years, down from 20-3 growth seen in previously. Manufacturing Manufacturing in Latvia continues to benefit from favourable developments in global economy and improvements in world trade and as a result in March manufacturing output grew by 7.4% y-o-y. Very good manufacturing data in March is another indication of a strong trend growth in manufacturing as over the previous six months manufacturing growth in Latvia has averaged 8% and similar trends are observed also in Lithuania and Estonia. 2
In March exports were again main growth driver in manufacturing as turnover in external markets rose by 16% y-o-y, while manufacturing turnover for domestic market only increased by 2.1%. Fastest growing manufacturing sectors in March was fabricated metal products (+10.1%), computers and optical devices (+38.8%), car parts (+27.6%), as well as electrical equipment (25.6%). At the same time March was second month in a row when output in two largest manufacturing sectors wood (- 2.) and food (-0.3%) 160 140 120 100 80 60 5% Source: CSB Manufacturing output, constant prices January 2013 = 100 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI I III 2013 2014 2015 2016 2017 Food Clothing Wood Building materials Fabricated metal products Furniture Manufacturing Computers (rhs) production. However, drop in wood production is likely to be due to temporary factors as exports of wood products rose sharply in March while slight decline food production is not surprising as sector continues to struggle with Russian sanctions and stagnant domestic demand. In addition to manufacturing last few months have also been very good to energy sector as weather conditions where very favourable to production of hydroelectricity. As a result output in energy sector in March rose by 19.1%. Inflation Increase in inflation begun to stabilize in March as annual inflation reached 3.4% which is only 0.1% higher than in February. Compared to previous month consumer prices rose by 0.9% in March although this is mostly due to seasonal factors. In March, main trends in inflation remained broadly unchanged compared to previous months and relatively high level of inflation continues to reflect mostly external factors while domestic price inflation has CPI, % y-o-y Electricity Goods Fuel Food Services CPI -5% Source: CSB, Citadele calculations 2010 2011 2012 2013 2014 2015 2016 2017 remained relatively stable since the middle of last year. In March, food prices rose by 5.5% while fuel prices jumped by 18.2% compared to previous year. At the same time compared to previous month food and fuel prices decreased by 0.4% and 0.3% respectively, which is reflecting recent stabilization and slight decline in global food, and energy prices. At the same time domestic inflation remains stable and in March service prices rose by 3. compared to previous year which was driven by telecommunication services (+7.1% y-o-y), insurance services (+10.9%) and training courses (+5.3%). 400 350 300 250 200 150 100 50 0-50 -100 3
Fiscal sector 3 2 - General government revnue and expenditure, Q1 2017/ Q1 2016 After prolonged delays to the start of the new EU fund REVENUE (TOTAL) 3.7% programming period EU funds are Tax revenue 6. Non-tax revenue 18.8% finally beginning to flow into Self-earned revenue 3.5% economy as government Foreign financial assistance -12.3% investment expenditure grew by 41.3% in Q1. At the same time EXPENDITURE (TOTAL) 1.4% overall general government Remuneration 8.5% Goods and services 7.4% spending remained subdued as Interest payments 5.4% expenditure excluding interest Subsidies and grants -16.8% payments grew by only 1.2% in Social benefits 6.9% Q1 compared to previous year as Capital expenditure 41.3% spending on subsidies and grants Other expenditure -28.8% declined by 16.8%. At the same -5-4 -3-2 - 2 3 4 5 Source: Fiscal council time government revenue in Q1 grew by 3.7% y-o-y and as a result general government surplus reached almost 100 MEUR up from 48.5% MEUR in Q1 of 2016. Besides capital expenditure in Q1 saw strong rise government spending on remuneration (+8.5%), goods and services (+7.4%), as well as social benefits (+6.9%). On the revenue side tax revenues in Q1 grew by 6. which broadly reflects overall economic growth rate. Growth in tax revenues was led by Personal income tax (+10.5%) and social security contributions (+10.4%), while VAT revenues increased by 5.3% and CIT by 4.1%. In addition non-tax revenues by 18.8%, however this was offset by 12.3% decline in foreign financial assistance due to volatile EU fund flows. External trade In Q1 Latvian export sector had the best quarterly growth since 2013 as strong export growth continued also in March and Latvian goods export rose by 13.2% compared to previous year while in Q1 as a whole exports rose by 10.1%. At the same time in March imports rose by 15.2% leading to slight increase in trade deficit mainly as a result of higher oil prices as well as one-off investments in transport sector. March was another good month for Latvian wood sector as export Merchandize export growth and contribution countries, % y-o-y Other Other EU UK&Sweden&Germany Poland Russia Baltics Total Source: CSB, Citadele calculations -2 2012 2013 2014 2015 2016 2017 of wood products rose by 17.8% and furniture by 9.1% compared to previous year while net export of wood products reached record high of 153 MEUR. This also suggests that slight decline in wood sector in manufacturing in recent months is likely to be due to temporary factors. In addition to wood 4
products, exports in March were also supported by milk products (+65.6%) and electrical equipment (+20.9%). In March export growth was also boosted by re-exports as export of beverages rose by 45.7% while export of oil products jumped by 22.9% which was matched by similar increase in imports. In March exports rose to almost all major Latvian export markets except Poland where exports declined by 17%. At the same time exports to Russia rose by 51%, to Germany by 28%, to Sweden by 21% and to Baltics by 8.5%. This material is solely of an informational nature and should not be construed as advice to buy, hold or sell any of the mentioned financial instruments. The authors of this material, as well as JSC Citadele banka or any of its affiliates, subsidiaries or representatives assume no responsibility for any inaccuracies or errors, for the possible use of the information contained in this material, such as explicit and implicit losses (including unearned profits), as well as for any penalties, even in case when they are informed about such possibility. The information contained in this report was obtained from sources believed to be reliable (www.bloomberg.com, www.reuters.com, other mass media, stock exchanges, central banks, national statistics authorities, company websites etc.), however JSC Citadele banka does not guarantee the accuracy and completeness of the information. The information and opinions expressed in this report reflect information and opinions as of the time of writing, and can be changed without any prior notice. In case of quotation, reference to the JSC Citadele banka or the relevant sources is mandatory. Any investment you make shall be based solely on your own evaluation of your financial circumstances and investment objectives. For the full text of disclaimer, please visit http://www.citadele.lv/lv/research/disclaimer/ 2a Republikas square, Riga, Latvia, LV-1010 Tel. +371 67010827 Fax +371 67010191 www.citadele.lv Regulator FCMC, www.fktk.lv 5