Currently, the global economic growth rate continues to be highly uneven. The last year was good for the United States of America and this year is expected to be even better; the growth in Europe is slow, while developing countries, including China and Russia, are expected to experience a structural decline. Low oil prices and monetary stimulation will promote economic growth, whereas geopolitical conflicts will still negatively affect the overall sentiment and risk appetite. The Latvian economy, in turn, is currently experiencing an economic slowdown, which is related to concerns about the future and certain political decisions that affect the issuance of temporary residence permits and mortgage lending. Likewise, many Latvian enterprises have to re-orient to external markets as the demand from the East decreases.
Good news from the Eurozone
“The Eurozone economy closed the year of 2014 on a more positive note than at the beginning of the year. To combat deflation and promote Eurozone recovery, the European Central Bank announced in January its long-term asset purchase program, which provides for monthly purchases of securities in the amount of EUR 60 billion from this March to September 2016. The weaker euro exchange rate as a side effect of this decision will assist Eurozone countries in increasing development rates”, Nordea's Economy Specialist, Gints Belēvičs, describes the economic situation in Europe.
US development may “drag along” other countries as well.
“The strength of US growth is characterised by labour market data that tend to positively surprise market participants on a regular basis. The US labour market is approaching full employment, with the unemployment level reaching 5.5%. The equity market and increase in real estate prices keep influencing the overall sentiment and welfare of inhabitants. Even despite the stronger US exchange rate, the world's largest economy will be able to reach GDP growth rates of at least 3% both this year and in 2016”, explains Gints Belēvičs.
Latvian growth still relies on domestic consumption.
“Latvia’s national economy closed last year with a GDP growth rate of 2.4%. This was mainly promoted by domestic consumption and the construction sector, which saw the highest activity for three quarters. Exports showed comparatively good results, growing by 2.0%, even despite weak external demand and the Russian embargo. In 2015, the Latvian economy might grow at a similar pace as last year, with activity increasing in the second half of the year. Nordea's forecast for the GDP growth rate in 2015 is 2.6%”.
The deposits made by non-residents have exceeded the deposits of residents, whereas lending has continued to diminish
At the end of last year, the deposits made by non-residents in Latvian commercial banks exceeded the volume of residents' deposits after a long break, reaching EUR 11.2 billion at the end of 2014 as opposed to EUR 10.7 billion of deposits made by residents. This will most likely not cause any risk to the Latvian banking sector, since local inhabitants mainly use the services of the banks that are not oriented towards attracting the deposits of non-residents. Moreover, the banks that attract the funds of non-residents have far stricter capital adequacy and liquidity requirements. In contrast to deposits, the credit portfolio of Latvian commercial banks continues to decrease, currently at the same level as 2006, which is almost half the level as in 2008. It is expected that this sharp decrease in credit portfolios will come to an end, and more active lending may resume by the end of the year or in 2016.
Income increases, consumption cannot keep up
Average salaries in the country have experienced a rapid increase over recent years. This might be explained by the decrease in the share of the shadow economy and the increased minimum wage, as well as the lack of qualified specialists on the labour market. The gross average monthly wage is rapidly approaching EUR 800, whereas the increase in consumption is not that rapid. The sentiment of inhabitants is still characterised by a certain degree of caution that influences them to decide in favour of savings instead of new purchases”, explains Nordea's Economy Specialist, Gints Belēvičs