Latvia’s Central Statistical Bureau (CSP) reported on Monday, the 30th of January, that the country’s gross domestic product (GDP) increased by 1.8% in 2022. However, the news also caused respected economic experts to become cautious and even pessimistic about the economy’s future.
The Ministry of Finances (FM) explains that it was the warm winter and state support provided to help cover growing energy prices that helped Latvia avoid a full recession in Q4 2022.
According to this institution, the generally low improvement of consumers and businesses mood is confirmed by ESI confidence index data. This, according to the ministry, comes from news about the drop of energy resource prices on the global market and passing of peak inflation in autumn 2022.
At the same time, the service industry remains affected by the drop in wholesale trade volumes experienced in spring.
The situation worsened in Q4 for the transit sector, where railway volumes experienced a sharp decline.
The Ministry of Finance is currently working on a macroeconomic indexes outlook for 2023 to commence work on Latvia’s Stability Programme, which is planned to be published in the middle of February.
However, according to current forecasts, Latvia’s economy is expected to suffer a 0.6% drop this year.
Analysis of the Ministry of Economics indicates – although GDP data for Q4 2022 is modest, the situation is slightly better than expected. Considering that in Q3 economic activity had dropped by 1.7% when compared with Q2 (according to seasonally adjusted data), it was expected the situation would continue getting worse at the end of the year as well.
Economic growth indexes suffered from foreign trade and rapid import growth.
In October-November the imports of goods in actual prices was 31% higher than it was in the same months of 2021. At the same time, exports of goods had increased by 18% last year.
The Ministry of Economics explains there is still a great deal of uncertainty about the Russian-Ukrainian war and the effect sanctions imposed so far will have on Latvia’s economy. This uncertainty affects residents’ consumption, corporate investments and foreign trade. It is expected for the situation to become the most difficult in the first months of 2023. Growth may come back around mid-2023. GDP in general may remain close to the levels observed in 2022, the ministry predicts.
«Development continues, but growth has stopped», says Luminor Bank’s economist Pēteris Strautiņš in regards to the current state of Latvia’s national economy. According to him, the most important number in CSP’s report – GDP has increased by 0.3% in Q4 when compared with Q3.
This is a small accomplishment, considering the external environment remained very negative in Q4.
«The industrial sector deserves special praise for resisting the ongoing growth of costs and market weakness. Consumers, too, deserve praise for their resilience in the face of difficulties caused by energy costs. The processing industry accomplished more than anyone could have asked of them at the end of last year. High energy resource prices combined with lower prices for certain end products (sawing materials) created a competition unfriendly environment, but production changes were still positive when compared with the previous quarter, unless December’s data doesn’t hide any unpleasant surprises. The surprisingly rapid development continue in the business services and ICT sectors, which is largely thanks to the contribution from exports of services,» the expert comments.
GDP drop for two consecutive quarters was caused by unfavourable external factors. Once they go down, growth should restart, the economist promises. This moment is coming close – electricity and gas prices, for example, in January are already approximately four times lower when compared with August 2022.
Consumption is expected to recover rapidly in the middle of the year. It may take longer for manufacturers, however.
For exporters of services, on the other hand, this year promises to be very profitable.
Investment dynamics is very much within the state government’s decision-making area. This is the best time to speed up use of EU funds – the economic situation is moderate, prices of materials (energy, metals, lumber) are down on global exchanges.
Citadele Bank’s economist Mārtiņš Āboliņš says there is no reason to expect growth for Latvia’s economy this year. Despite slight growth observed in the previous quarter, Latvia’s economy balances on the brink of a slight recession – the country has managed to avoid a drop largely thanks to the quarantine observed at the end of 2021 and many covid-related restrictions.
According to him, there is some good news – European and Baltic States have managed to dodge the worst case scenarios related to the energy crisis. Natural gas prices in Europe have dropped considerably since summer last year. Currently the price drop is felt by the clients using dynamic electricity tariffs. This year’s energy resource price drop will gradually be reflected in heating bills.
The better than expected situation in Europe’s energy sector allows for a slightly more positive look at the perspectives for the economy in general. The mood of businesses has started improving slightly, and Eurozone’s economic growth outlooks are no longer downgraded. However, the recession in Europe is unlikely to be avoided. An economic decline has already commenced in Sweden, for example, the economist reminds.
The energy crisis was successfully avoided thanks to efforts in replacing gas imports from Russia with other suppliers or by using other energy resources, such as lumber fuel and coal. Production in energy intensive industries is also down. This means that the industrial sector in Latvia and Europe in general is currently in recession, and the challenge is not only about limited availability of energy resources but also with stores in many different sectors. This means the volume of new orders is low.
Recovery of the industrial sector is expected to come no sooner than in the second half of 2023.
The good news for Latvia’s economy is that in the first half of 2023 inflation is expected to go down considerably. Overall purchasing power of Latvia’s residents may remain on the level of 2022. At the same time, in the next two years there are plans for massive EU investments, which may be EUR 700-900 million higher than last year. This should help out the construction sector in a time when activity in the private sector is lower, explained the expert.
With decreasing inflation and the growth of interest rates of central banks is coming to a close. Higher interest rates have already cooled down the real estate market. Despite the more positive situation in the energy sector, the global economy still shows signs of an approaching recession.
Good news may come from China this year, where the economy is expected to recover after lifting Covid-19 restrictions. However, higher demand in China may also cause natural resource prices to go down, which is why the real challenges caused by the inflation are not over yet.
According to Āboliņš, Latvia’s economy may drop by 1 – 1.5% this year and grow by 3 – 3.5% next year.
The latest data for GDP surprised Swedbank acting chief economist in Latvia Agnese Buceniece: instead of the drop, the bank expects very slight growth. According to her, this means the economy has dodged a descent into recession.
The economist says CSP’s data for October and November is important, as it shows that production volumes continued growing in most service industries. It was the most rapid in travel and leisure-related sectors, which largely came from recovery after lifting pandemic-related restrictions. This effect was so strong that even the growing living expenses could not stop it. Successes in retail also came largely from recovery after the pandemic.
Despite the drop in purchasing power, residents’ consumption remained surprisingly resilient bot in actual prices and after corrections for inflation. Consumption continued recovering from pandemic restrictions last year. Recovery came from increasing numbers of residents, employment and wage rise, savings gathered during the pandemic, as well as state support. However, as utility bills went up, consumption may have started going down.
At the same time, December was not as successful as the two previous months. Due to reducing purchasing power and increasing heating bills, sales of goods are down as well.
It is believed that manufacturing sectors were pulled down the most by the construction sector. Although the general mood of construction companies is up slightly, it remains more pessimistic than it was a year ago. Due to the high gas prices and unusually warm weather, the energy sector may continue experiencing decline. Nevertheless, the drop in energy volumes produced is lower than it was in Q3. The strong result observed in November may have helped pull the processing industry from the negative zone for a moment. The coming months are not looking too rosy either. New export orders are becoming smaller and so does the economic growth of Latvia’s main trade partners.
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