GDP data is disappointing, but the future looks impressive | Luminor

On the changes in GDP in the 4th quarter of 2017

The first economic performance assessment at the end of last year is slightly disappointing. In comparison to the 4th quarter of 2016, the gross domestic product (GDP) increased by 4.2%. According to this provisional data, the economy of Latvia during the last year has grown by 4.5% and not by 4.7% or even 4.8%, as was previously expected. 

Seasonally adjusted GDP, which takes into consideration the differences in the number of business days in the 4th quarter, as opposed to the previous period, has grown by 0.3%, but annually - by 4.8%. The total added value in 2017 might have increased by 5%.  
This data will be updated in a month.  In comparison with other data, the initial assessment of the collected sales taxes, which is +3%, seems surprisingly low.  We do not know the results for January yet, which will reflect developments in the economy in December. It seems that just prior to the rise in excise duty the increase should be very significant. 

The increase by 5% for the year in added value of industry in the 4th quarter should be considered as a slight disappointment. During this period it was very difficult to anticipate the dynamics of the energy industry. Weather conditions promoted the production of electricity, but reduced the demand for heat. 

Collision of an unstoppable force and an immovable object

Taking into consideration the previously mentioned factors, the 4th quarter GDP may be recalculated upwards. However, these tenths of a per cent do not change the overall picture. The year 2018 will be very intense for the economy of Latvia. After a period of ten years when the main limitation was insufficient demand, now we increasingly see shortcomings in supply. Average forecasts see a rather sharp slowdown of growth by up to 3% within the next couple of years. It might indeed happen so. However, the real speed of the economy will be disclosed in the next two years, when its potential is tested in extreme conditions. Then we will see how this experiment changes the rate of growth of productivity, and what happens to the migration balance.

Speaking imaginatively, the rate of growth of the Latvian economy in the future will be defined by the collision of an unstoppable force and an immovable object. For the next three years, the conditions will be very favourable for demand: money will flow into Latvia thanks to exports, RailBaltica and EU funds. Decreasing unemployment and increasing salaries will cheer up the consumers’ mood. Substantial growth in household income during the previous years has not succeeded in making the migration balance positive. For this reason, and the decline of the birth-rate in the nineties of the last century, the share of able-bodied population is decreasing. However, the attractiveness of living and working in Latvia will improve in the nearest future. 

Will demography change the economy or will the economy change demography?

The collision of an unstoppable force and an immovable object has already started. Something will have to give way: either the growth will slow down or the increasing competitiveness of Latvia as a place of residence will change the demographic tendencies. If one wishes, we may see both events happening. There are rumours going around about some companies in Riga, for example car service garages, where all the employees have left their jobs. So the value-forming process is giving up, and development is suffering. 

However, the Estonian example shows that it is possible to achieve growth of population by the level of income, which could take several years. It is not anticipated in the most popular demographic forecasts. However, their assumptions provide flat, bureaucratic economic forecasts, which do not assess the real potential of export industries. 

Even if the size of Latvian population does not grow in the nearest future, internal migration may help, providing people with opportunities to leave places where they are currently forced to waste their time on trifles or do nothing. The "migration” of the production process would be even better, which would require firms moving in search of a cheaper labour force. 

Productivity may be facilitated by a quick salary raise

In order for income to grow, productivity has to increase, as there is not much room for the redistribution of reserve income between the owners of the assets and the employees. The Latvian media is full of senseless announcements that “we have to raise productivity”. We can talk about it in the debitive mood endlessly, but nothing will change. A quick rise in salary, in its turn, may facilitate productivity more than never ending platitudes about this having to be done “in principle”. 

Sometimes in order to raise productivity, investments are needed. At other times, miracles are achieved by organising work better, when there is an irresistible need for improvement. It is also possible for it to happen as if spontaneously. For example, shopping centres are full of smaller shops, where in order to ensure the continuity of business, let’s say, three shop assistants are needed, who spend part of their time waiting for customers. It is very likely that these three shop assistants may ensure twice as much turnover. In the services field there are lots of such examples. 

Could the risks of financial markets influence the situation in Latvia?

It is clear that we cannot count on the current rate of development to last protractedly, even if it is possible for the next three years. Thinking about risks, the first thing that comes to mind is the “achievements” of the US stock market. We have to ask what the influence of a possible correction will be on the real economy. The fact that the US economy may go into recession until the end of next year is very likely. This development cycle is already one of the longest in history. However, it does not necessarily mean recession in the euro zone, which is in a totally different phase of the economic cycle. Moreover, a recession in the euro zone does not necessarily mean recession in Latvia: during two out of three last recessions in the euro zone, our national economy continued to develop successfully.

It is very possible that in 2019–2020, due to structural funds, RailBaltica and the crediting cycle, economic intensity will have reached the point when external cooling movements will be just what the doctor ordered. However, they will come from export, thus continuing the tradition of accumulating contradictions for solutions in the future.  

For media contacts: Lita Juberte-Krumina