«Cracks are appearing in the clouds of economic outlooks,» Luminor Bank describes its latest economic outlook in a figurative and hopeful manner.
The bank reports – the drop of energy and raw material prices and the rapid development of exports of service prices have helped increase Latvia’s GDP growth outlook for this year. While in autumn last year the bank predicted a 0.5% GDP drop, this time Luminor Bank’s economist Pēteris Strautiņš predict growth of 0.6%. [Latvian Ministry of Finance, meanwhile, predicts zero GDP growth for this year – BNN.]
The growth outlook for 2024 is downgraded from 4.6% to 3.7%, and
it is expected that the price leap observed in the past one and a half years will be followed by a price drop and a period of deflation.
Lower inflation will help residents spend more money on various purchases that are not necessities. Signals are coming up that EU funding is on the move. Investments, however, are a source of uncertainty for this year’s economic results. Export growth after a very successful 2022 will be slight, exports of services will balance out the expected drop in distribution of goods outside of Latvia.
EU funds represent this year’s hope for Latvia. Then there is residents’ purchasing power. Now is the best time to speed up the use of EU funds – growth is generally weak, prices of materials are down. Lasting stagnation in Latvia’s housing market has created good conditions for investments in this field – there is high potential demand and the debt level of households is low.
Although actual wages went down in 2022, the decision to lift epidemiological restrictions assisted with growth of consumption. Purchasing power will likely improve slightly this year, but it will remain below that of 2021.
Families will try to increase savings, which is why the bank does not expect a significant rise in consumption.
The situation is expected completely different for 2024 and following years, when the bank expects a wage increase together with low inflation and deflation.
Inflation will go down. Prices may follow. Although in January and February annual inflation was higher than 20%
it may drop in the negative by the end of the year. Average inflation is expected between 7-8%.
A drop in housing maintenance costs started at the end of 2022. This year this process was joined by multiple important food products. Prices of goods in categories that directly depend on prices of raw materials will continue going down, perhaps even next year. Price drop for certain goods of lasting use, such as household appliance, is also believable. Prices will continue going up for most consumption product groups. It will primarily depend on the wage level in the country. Influence from two major positions – housing costs and food – will be decisive. It is expected for the average price level to drop by approximately 1% in 2024.
The general export picture is contrasting. Multiple export sectors demonstrated very good results last year. Exports of value added services has increased by more than EUR 800 million. Exports of transport services has increased by one-fifth when compared with 2021. The actual growth of exports of services (+20%) was the most rapid since 1996. Exports of goods (+5.6%) was similar to the average index of the previous decade.
It is expected the contribution of export sectors will be very unambiguous in 2023. The perspectives of IT, communications, finances, business services are very good. The transport and tourism sectors remain affected by sanctions and high regional risk. Recovery of these two sectors could come around 2024.
The biggest troubles are expected for exports of goods, because prices of multiple important products will no longer go up or down. The crisis is already a reality for the wood-working industry, especially sawmills. It was caused by downward slide in important housing markets (US, China and elsewhere), the end of which is nowhere to be seen. Engineering sectors – electronics, metalworking, mechanical engineering – have the best chances. It is expected that growth of exports may restart in 2023, and this is one of the main reasons for the expected restoration of growth.
The labour market is stable despite the slower GDP growth last year. The average number of employed people in 2022 went up by 22 000 or 2.6%. The ability to continue growth of employment will remain highly dependent on immigration, because the demographic trends are generally negative.
The risk of growth of unemployment is maintained by the fact that the industrial sectors impacted by the difficulties experienced by the export market, primarily in wood-working, are very geographically concentrated – especially in Eastern Vidzeme, central portion of Kurzeme and elsewhere in Latvia. This is why employment opportunities in these regions may be very limited, as warned in Luminor Bank’s economic outlook.
Also read: Latvia’s GDP grows by 2.0% in 2022