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Commentary on the GDP data in the 3rd quarter by Peteris Strautins, a Luminor economist
Over the year in the 3rd quarter of 2017 the GDP increased for 6.2% – most rapidly since 2011. From the last year the acceleration of the growth, first of all, was defined by the investments; however the export and consumption grew as well. Evaluating the developments in different fields, the construction sphere is growing undoubtedly faster, but manufacturing, trade and surprisingly the transport have their contributions in the growth as well. As to my assessment this year the economy has grown for 4.8%, next year the pace will be similar, more likely with a bigger consumption, but less export. In comparison with the previous period, the gross product has grown for 1.5%, very similarly to the performance during the first three quarters.
The increase of the added value in processing industry for 8.4% corresponds to the familiar situation, just like the growth in construction for 25%. I doubt that anybody expected such a big plus in the transport and storage field (+9.9%), which reminds us of how important to this sphere is the growing internal market and the export of aviation, as well as road transport services in directions not related to the “classical” transit. The decrease in financial services for 11.4% is related to more than a triple reduction of profit from the securities market, which some would call “speculative activities”. Servicing of domestic clients is developing along with the general development of economy. Unexpectedly weak are the catering and accommodation services (+2.4%), keeping in mind the huge investments into hotels and considerable increase of tourists this year. Taking into consideration that sports, entertainment and leisure services have increased even for 15%, we might expect also bigger expenses of Latvians for eating out, which sometimes grows proportionately faster than the income, as we may observe this in other “luxury” fields.
The increase of investments or creation of gross equity capital for 20% is natural due to the political swing effect of EU funds and along with the decrease of excessive caution in private sector. The correlation of investments against GDP is still very low (21.9%), it will definitely continue to grow next year. The increase of export for 2.4% seems rather weak, but the rapidly growing added value in the exporting industries allows us to see this as an unsuccessful coincidence. The increase of consumption for 5.8% should be regarded as “sensible", corresponding to the increase of salaries and worked hours.
Economy starts to warm itself
This year the growth is faster, firstly, not due to something good, but rather because bad things stopped to happen. Undoubtedly the external conditions have improved, the euro zone GDP growth reaches 3%, but the logic of internal processes has its huge importance as well.
Metaphorically, post-crisis economics has been like a sluggish fire. We might have noticed occasional outbursts of small, yet weak flames around the logs keeping them burning but not giving enough light and warmth that the fire wood could potentially generate. Meanwhile the room, which the fireplace should have heated, is still cold. Part of its inhabitants has left the room, at least for a while.
Those, who regularly deal with authentic heating systems know, that such languishing may spontaneously turn into full-fledged burning, when the heat exceeds the critical threshold, which may not be predicted precisely beforehand. This is how we could describe the events in Latvian economy this year.
Looking into the rear vision mirror, undoubtedly, our economy needed a stronger stimulus after the crisis; the budget deficit was reduced too sharply. Instead of meditating on the structural deficiencies of the fireplace, we should have rather just blown a bigger flame. Not waiting for the inducement from the state, the economy was able to get out of the pit itself. But it does not mean that tomorrow we should do what we had to do yesterday. There is a chance that we might fall in the opposite extreme, which is why we should not blow the flames of the fireplace with the fiscal policy instruments in the coming years.
We should get rid of economic inferiority complex
It seems that Latvia is overtaken with the feeling of guilt that economy is not growing sufficiently fast. It is a habit to talk about economy as of a problem zone of our society. It undoubtedly is our “child of sorrow” in a meaning that a real GDP per capita is the fourth smallest among the EU countries. However the pace of growth at least in the nearest couple of years will be very pleasing. Taking into consideration our history, we should not feel guilty for the comparatively low level of welfare in Europe - we have to finally get rid of the economic inferiority complexes. In comparison with the 3rd quarter of 1995, the real GDP per capita has increased for 3.23 times, per person employed: 2.64 times, thus reflecting the increase of productivity. Comparing the “quality” of economy, which first of all is reflected by the portfolio of export and services, the changes during this period, has been magnificent.
Krajbanka - Metalurgs - Russsian crisis - pause in EU funds acquirement
These were the events that kept the growth on a low level in 2013-2016. These troubles influenced economy, which had not managed to recover from the big crisis, where consumptions, real estate investments and other factors forming the economy cycle were at a too low level.
The economic growth is created by thorough work and enjoyment of the results of this work. For some time there has not been any balance between these two parts, going from one extreme to another. Yet, there still is a hope that in two coming years this balance will be restored. It will not hinder the implementation of the structural reforms, on the controversy; revolution is a child of hope, not desperation.
More rapid growth may change the dynamics of the number of population. Initially we will not see this in national numbers - people will concentrate in the developing centres, moving inside the country. However, there they will help to create a critical mass necessary for the other to join them.
Hope may be born when you are most exhausted
In the nearest future we might see, how the “Dornbusch reverse law” works, how I call it. Economist Rudiger Dornbusch once have said that “the crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought". In other words, after a too excessive optimism period, which serves as a reason for crisis, the fall into the opposite extreme may happen very fast. The bubble may be blowing much longer than pessimists expected and it may burst, when nobody believes pessimists any more.
Likewise, only on the contrary, it may happen with the exit from crisis. You might have to wait for it for a long time. Nevertheless, when you get out of the excessive pessimism, everything happens very fast. Increasing optimism, investments, salaries, consumption and employment all come in one closed circle. Economy switches from the negative balance to positive very quickly. Just like when the balance of hormones causing happiness and unhappiness changes in blood, we interpret the surrounding world extremely differently, the tone and voice of discussions in society also changes.
Peteris Strautins
Economist
peteris.strautins@luminorgroup.com
Media contacts: Lita Juberte-Krūmiņa