An economic recession nearing its end or a deceptively positive picture? Bank economists evaluate GDP changes / Article

Geopolitical conditions and natural disasters

The economist of the Bank of Latvia, Daina Paula, drew attention to the recent changes in the gross domestic product (GDP), which we have been able to look at from a very moving starting point, as if the data were hit by an earthquake. In the 1st quarter of this year, the flash estimate shows a 0.8% GDP growth during the quarter (seasonally adjusted data), although the picture created by the short-term data was quite diffuse.

She pointed out that the withering of the further vision of economic growth in a thick layer of uncertainty is no longer new. The outlook for the development of global trade, as well as the Eurozone growth forecast in the current publication of the European Central Bank’s forecasts worsened; similarly, in the latest forecast publications of the EC and the International Monetary Fund, the assessment of the near-term growth of important trading partner countries of Latvia has worsened, and this is a signal of weak demand for Latvian exports.

Perhaps with small dimensions (the relatively small size of Latvian companies) it is easier to maneuver through the hustle and bustle of influencing factors, however, if this bustle becomes dense and rapidly undulates, the small dimensions alone may not be a sufficient advantage. Both geopolitical uncertainty and weather vagaries inevitably lead to short-term thinking.

Gradual and uneven recovery

Meanwhile, “Citadele banka” economist Mārtiņš Āboliņš sees that in recent months, more and more positive signals can be seen in the Latvian economy, that growth could resume after two years of stagnation. He pointed to the decline in inflation, the fact that the mood of entrepreneurs and consumers is no longer deteriorating, it has even improved slightly in recent months, while unemployment is low and wages continue to grow rapidly. This gives a positive impulse to consumption, and in March the growth of retail sales was the fastest since the fall of 2022. Meanwhile, financial markets are still expecting the first ECB interest rate cut as early as June.

In recent months, the economic situation is also improving in Latvia’s export markets. In the Eurozone, the mood of entrepreneurs reached the highest level in the last 11 months in April, stocks of finished goods in industry in Europe continue to decrease gradually, and new orders in industry are starting to increase in Latvia, which is a positive signal for exporters, said Āboliņš.

According to him, after two years of stagnation in the Latvian economy, there is reason for cautious optimism and

this year in the economy is likely to be better than the last, but the recovery will be moderate and uneven.

In industry, there are reasonable expectations for a cyclical increase in demand, but this is rather related to the need to replenish warehouse stocks, and it is still too early to talk about sustainable growth. Meanwhile, despite the financial market’s expectations of a rate cut, interest rates in the eurozone are still high, which slows down lending, and a recession is possible in construction in the eurozone this year, Āboliņš explained.

He also drew attention to the fact that last year’s drop in output in Latvian industry and trade was compensated by growth in service industries, but in the first quarter of this year, the output of service industries in Latvia has decreased by 1.1% compared to last year. The number of tourists in Latvia continues to grow, but it still lags behind the 2019 level. Also, in the second half of last year, the export of IT and business services in Latvia slightly decreased, which is only the third decrease in the last 20 years.

At the same time, there are still many risks in the world economy, and living in the shadow of war certainly does not help investments either, therefore, in Āboliņš’s assessment, Latvia’s economy could only grow by about 2% this year.

The economy warms up slowly and only from within

Pēteris Strautiņš, the economist of “Luminor” bank, also drew attention to the fact that the economy is gradually emerging from the shallow recession that characterized the last year as a whole. It grows, but without much energy. QoQ growth of 0.7% is quite strong, but the economy is unlikely to sustain it throughout the year, especially with export markets still quite weak and consumers quite cautious.

He assessed that the export side of the economy is relatively weak. In manufacturing, the main export sector, production fell by about 4% in the first quarter. The long-reliable “white-collar” service export engine has weakened significantly. Only moderate growth is expected in the IT and business services sector, with slight downsides also possible. Production changes this year could be around zero overall, which is better than last year, but not enough for economic development.

We cannot hope for a rapid improvement of export markets. New investments are needed in this sector, the main source of which, combined with products ready for production and available sales channels, will most likely be the Nordic countries, Germany and France, said Strautiņš.

The picture is better in domestic consumption. The economist predicted that a strong (around 8%) increase in real wages can be expected this year, which is an echo of the three-year period (2021-2023), when the economy grew very rapidly in monetary terms. In turn, the increase in investment will be financed by European funds, which is partly an echo of the pandemic.

Strautiņš pointed out that this year the economy is not only driven by the echoes of past events, but also the inhibiting factors are largely echoes of the past. There are hopeful signals in industrial sentiment data. On the other hand, the minds of consumers are healing the injuries caused by inflation, the expectations of price increases continue to weaken.

“There will be economic growth, there will be,” assured Strautiņš.

Zorgenfreya: GDP paints a deceptively positive picture

On the other hand, the chief economist of “Swedbank” in Latvia, Līva Zorgenfreija, explained that this year the government’s support, which was provided last year in the conditions of high energy resource prices, has significantly decreased. Since subsidies are subtracted from the total GDP in GDP calculations, the decrease in energy resource subsidies at the beginning of this year gave a positive contribution to GDP.

According to her, the road to recovery in exports and the manufacturing industry dependent on it will not be smooth. A drop in exports was experienced in February, and the view of producers on exports in the coming months is cautious – no increase in export orders is expected.

The economist looks with hope at the fact that there is a positive growth not only in the consumption of goods, but also the consumption of services could have increased. Households as a whole will be one of the main pillars of economic growth this year.

Although the GDP data is more positive than expected, the interpretation of the economic development has not changed – the economy is still in stagnation, Zorgenfreja pointed out.

A faster and more sustainable rate of growth in the Latvian economy is expected only next year.

Then, under the influence of stronger growth and lower interest rates, construction activity and housing markets in trade partner countries will begin to recover, and as a result, our exports will grow, explained Zorgenfreija.

The European Central Bank has kept rates consistently high for some time now, but inflation is receding. The bank’s economist predicts that the turning point for lower rates could be June.