The recovery of Latvia’s economy will be moderate and uneven this year, while a faster and more sustainable growth rate of gross domestic product (GDP) is expected in Latvia’s economy next year, bank analysts predicted for the LETA agency, commenting on the Latvian GDP rapid assessment data published on Monday.
Bank “Citadele” economist Mārtiņš Āboliņš told LETA agency that the year 2024 has started with a slight decline in the Latvian economy, however, the recession is coming to an end and already in the second quarter of this year, growth in the Latvian economy is likely to resume.
He points out that according to the initial GDP assessment published by the Central Statistics Office, in the first quarter of this year, excluding inflation, Latvia’s GDP decreased by 0.2% compared to the corresponding period of the previous year, while compared to the last quarter of last year, Latvia’s GDP increased by 0.8%. which is the largest growth in the Latvian economy within one quarter since the beginning of 2022.
“In recent months, the Latvian economy shows more and more positive signals that growth could resume after two years of stagnation. Inflation has decreased from more than 20% at the beginning of last year to 1% in March this year, the mood of entrepreneurs and consumers is no longer deteriorating, even in recent months is improving slightly, while unemployment is low and wages continue to grow rapidly. This gives a positive impetus to consumption, and in March retail sales in Latvia increased by 2.8%, which is the fastest growth in retail sales since the fall of 2022, and financial markets are still expecting the first European Central Bank (ECB) interest rate reduction already in June,” says Āboliņš.
He points out that the increase in consumption is also confirmed by the payment card data published by the Bank of Latvia, but positive trends are visible not only in trade. In the last few months, the situation is also improving in Latvia’s export markets – in the eurozone, business sentiment reached the highest level in the last 11 months in April, the stocks of finished goods in industry in Europe continue to gradually decrease and new orders in industry in Latvia are starting to increase, which is a positive signal for exporters.
“After two years of stagnation in the Latvian economy, there is now, in my opinion, a basis for cautious optimism and this year in the economy will most likely be better than the previous one, however the recovery will be moderate and uneven,” emphasizes Āboliņš.
He explains that there are reasonable expectations of cyclical demand growth in industry, 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 financial market expectations for a rate cut, interest rates in the eurozone remain high, holding back lending, and construction in the eurozone is likely to be in recession this year. Likewise, 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 the corresponding period of last year.
Āboliņš also adds that the number of tourists in Latvia continues to grow, but it still lags behind the 2019 level. Similarly, in the second half of last year, the export of information technology (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.
According to the forecast of the economist of “Citadele” bank, the Latvian economy could grow by only about 2% this year.
Dainis Gašpuitis, macroeconomic expert of “SEB banka”, told the LETA agency that the revised GDP data will still bring corrections, but in general, such an outcome was expected.
“At the beginning of the year, economic activity was relatively stiff, which most likely also affected the performance of the construction sector at the beginning of the year. The recession continued in the transit sector. However, step by step, activity gradually intensified, as evidenced by the growth of 0.8% during the quarter,” Gašpuitis says.
He also notes that retail sales were able to show an increase of 2.8% in March. It is likely that the traction will also strengthen in the service sectors and consumption in general. It will continue to be driven, albeit unevenly, by the sufficiently rapid recovery of purchasing power.
“The performance of construction, which compensated for the negative indicators in other sectors last year, will have a significant impact on the overall indicators. There are also signs of gradual stabilization in exports. However, taking into account the difficult situation in the main markets, growth could return towards the end of the third quarter,” Gašpuitis says.
At the same time, he says that due to geopolitical risks and delayed reduction of interest rates, the recovery will proceed at a moderate pace. Private investment will be cautious, so public investment will have a critical impact on economic activity.
“Luminor Bank” economist Pēteris Strautiņš told LETA agency that compared to the last quarter of 2023, GDP grew by 0.8% in the first quarter of this year, while in the fourth quarter of last year this indicator was 0.4%. “So let’s pick up the pace,” he emphasized.
At the same time, Strautiņš notes that, taking into account that previously there were three quarters with “minuses”, in the first quarter of 2024 GDP still decreased compared to the beginning of the previous year. True, only in seasonally adjusted data. The economy has grown over the year in seasonally adjusted data, which can be considered a more reliable indicator of “true” trends.
“You could also say, a big mess of numbers. To put it simply, the economy is gradually getting out of the shallow recession that characterized the last year as a whole. It is growing, but without much energy,” says Strautiņš, adding that the increase compared to the corresponding quarter of last year by 0.7% is quite strong, but the economy is unlikely to sustain them throughout the year, especially when export markets are still quite weak and consumers are quite cautious. To make you worry about these details even less, it can be added that these numbers will be recalculated several more times.
“There is no doubt about it – the export side of the economy is relatively weak at the moment. In the manufacturing industry – the main export sector – production decreased by about 4% in the first quarter. Unfortunately, the engine of export of “white-collar” services, which has been very reliable for a long time, has weakened significantly. In the IT and business services sector only mediocre growth is expected, small downsides are also possible. Production changes this year could be around zero, which is better than last year, but it is not enough for economic development,” notes Strautiņš.
He also mentions that there is no hope for rapid improvement of the export markets – the general index of European economic mood (ESI) has been stuck at a lukewarm pessimistic 96 points for five months. New investments are needed in this sector, the main source of which, combined with production-ready products and available sales channels, will most likely be the Nordic countries, Germany and France. Thus, this is not the right moment to drag out the choice of the head of the Latvian Investment and Development Agency (LIAA), because unfortunately too many opportunities have been missed in this area.
At the same time, Strautiņš points out that the situation in domestic consumption is better. This year, we can expect a strong – around 8% – increase in real wages, which is like an echo of the three-year period (2021-2023), when the economy grew very rapidly in monetary terms. On the other hand, the increase in investment will be financed by European funds, which is partly an echo of the pandemic, which has already begun to be forgotten, but the money intended to overcome its consequences has not yet been spent.
“From what has been said, one may get the feeling that this year the economy is only driven forward by echoes of past events and next year it will stop altogether from exhaustion. However, it should be noted that the slowing factors are also largely echoes of the past. Weakness in industry is a consequence of supernaturally strong demand in several sectors in 2021 .- in 2022, as well as for the central banks’ fight with inflation. On the other hand, consumers have not yet fully recovered from the loss of purchasing power suffered in 2022,” Strautiņš explains.
He points out that Latvia’s ESI index has hardly changed for three months, but it is at 98 points, so it is at a slightly higher level than the average in the European Union (EU). There are hopeful signals in the industrial sentiment data – both in estimates of the volume of production in the near future and in the recent past, as well as in the estimation of stock levels, they are shrinking. At the beginning of the second quarter, the rating of new orders in industry has improved dramatically.
On the other hand, Līva Zorgenfreija, chief economist of Latvia’s Swedbank, told LETA agency that at the beginning of this year, the added value of industries in the Latvian economy decreased significantly, product taxes were collected less, but GDP remained almost unchanged compared to the corresponding period of last year.
She points out that in the first quarter of the year, Latvia’s GDP in comparable prices decreased by 0.2% compared to the corresponding quarter of 2023, while compared to the previous quarter, GDP grew by a rapid 0.8%. “It is quite understandable that the question arises – how is this possible? The answer – the government 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 has made a positive contribution to GDP ,” explains Zorgenfreya.
She notes that after picking up at the end of last year, manufacturing output at the beginning of this year is likely to have contracted again both quarter-on-quarter and year-over-year. On the other hand, the export of goods, after a long-term decline, looks quite good for several months now, and in January there was even an increase compared to January of last year. In February, however, exports decreased again, and manufacturers’ view of exports in the coming months is cautious – no increase in export orders is expected.
“It is clear that the road to recovery in exports and the manufacturing industry that depends on them will not be smooth,” says Zorgenfreija.
She mentions that on the side of the manufacturing industries, the added value was based on energy – in the first three months of this year, more electricity was produced than a year ago. On the other hand, construction, which grew rapidly at the end of last year because it was necessary to complete the projects of the previous cycle of EU funds, probably did not show brilliant results at the beginning of this year.
On the service side, according to Zorgenfreija, there has been a general drop in added value, however, a positive story is the retail sector, where a 0.9% increase compared to the same period last year was registered in the first quarter. Inflation is very low, net wages are growing by more than 8%, consumer sentiment is generally improving, and “Swedbank” card data show that citizens spent 6.2% more on goods and services at the beginning of the year than a year ago. This allows us to hope that there is a positive increase not only in the consumption of goods, but also that the consumption of services could have increased. Households in general will be one of the main pillars of economic growth this year.
She mentions that although the GDP data is more positive than expected, the interpretation of the economic development has not changed – the economy is still in stagnation. The situation is similar in Latvia’s trade partner countries, for example, Sweden’s economy continued to stand still at the beginning of the year, that is, compared to the previous quarter, there was a 0.1% drop.
“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 trading partner countries will begin to recover, and as a result, our exports will grow. The ECB rates have been consistently high for some time now, but inflation is receding and we predict that the turning point to lower rates could be in June,” says Zorgenfreja.
It has already been announced that the GDP of Latvia in the first quarter of this year, according to the seasonally and calendar unadjusted rapid assessment data, decreased by 0.2% compared to the corresponding period of 2023.
According to preliminary estimates, GDP was affected by a decline in the manufacturing sector by 1.4% and in the service sector by 1.1%. Product taxes were collected by 0.4% less, but product subsidies, which reduce GDP, decreased by 60.2%.
At the same time, according to seasonally and calendar adjusted data, the Latvian economy grew by 0.7% in the mentioned time period.
On the other hand, in the first quarter of 2024, compared to the previous quarter – the fourth quarter of 2023 – according to seasonally and calendar adjusted data, GDP increased by 0.8%.
A detailed report on the adjusted GDP size and changes in the first quarter of this year will be published on May 31.
