The economy is slipping into deficit

LATVIA – ECONOMICS 

According to Agnese Buceniece – Acting Chief Economist of Swedbank in Latvia (October 2022), Commentaries the Central Statistical Office (CSO) estimate of gross domestic product (GDP) shows that the economy contracted by 0.6% in the third quarter compared to the corresponding quarter of the previous year. In comparison with the second quarter there was a decline of 1.7%.

The economy is slipping into deficit
Photo by lsm.lv

This was slightly more than we had expected. All data, however, has not been summarized, so it is possible that the Central Statistical Office will revise the GDP figure in a while and it may turn out that the decline was smaller. Something similar happened with the second quarter data.

The cost of living has increased significantly both in Latvia and in Europe as a whole, and it inevitably starts to limit the development of the economy. For the Latvian economy and GDP this means a decline in household consumption, weakening of exports and cautiousness in terms of investment activity.

Initial calculations by the CSA show that these are the most difficult times for the manufacturing industries. There, value added decreased by 3.9%. Construction, where contracts and plans are being renegotiated due to high construction costs, most likely continued to decline.

Reacting to lower orders, including in export markets, manufacturing output began to decline. Due to high gas prices and resource savings, we used less thermal power plants and accordingly produced less electricity than the year before. 

At the same time, services were still holding steady at 1.7% year-on-year growth. Admittedly, this is much slower than before. Business services, especially not oriented towards the Russian and Belarusian markets, are likely to show more stable results.

At the same time, there is an increase in fluctuations in services provided to the population. Inflation makes us spend more, but at the same time we buy fewer goods and services. Data on card payments show that residents’ spending, which is adjusted for inflation, has tended to go down in recent months. Retail trade data shows a similar picture. However, September was a positive exception, which is probably due to the payment of indexed pensions for two months at a time.

After the lifting of coronavirus restrictions during the spring and summer months, consumption still relied on residents’ desire to purchase various services related to recreation, entertainment and travel. Now the trend seems to be reversing and the demand for these services is weakening again.

This is not only due to seasonal factors but also because residents are starting to save money. Moreover, the population is saving not only on services, but also on goods that are not basic necessities. The savings are likely to culminate in the coldest months as soon as the heat meters in homes start to turn faster and this will show up on the bills. It is true that October was still quite warm and gentle on people’s wallets.

The economy has already slipped into negative territory and the decline will continue in the next two quarters. The depth of the «hole» will be reduced by state support both in Latvia and in our trading partner countries.

Forecasts show that the decline will be short-lived and small. The situation of the economy will start to improve in the spring, when heating bills will lose their relevance, and inflation will also start to recede at a rapid pace. Investments from EU funds, which are still delayed this year, will help the economy over the next year.

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