The consumption keeps up with the growing economy

Luminor economist Peteris Strautins comments on changes in the retail business in November 2017.

The November retail business turnover data is the latest novelty in macroeconomics this year

Just like the news on this year’s economics in general, this message is about significant, strong, but not euphoric growth. It is just a coincidence, but the growth of the retail turnover anticipated by the statisticians for this month in comparison with the last November was 4.7% in real terms or exactly as the typical forecast for the GDP growth this year. In comparison with the previous month, the turnover of goods in the stores has grown by 1%.

The trade of food products and drinks in the specialised stores is growing admiringly well - already for the seventh month in a row the increase exceeds 50%. One of the reasons is the well known borderland trade - approximately 80 million EUR per year come from Estonia alone in the form of excise taxes. The trade of household electrical appliances has also rapidly grown in November - by 40.8%, but this month should be taken as an exception to the general tendency, although it is not bad at all – an increase by 16%.

The turnover of stores in monetary terms during this year has grown by 8.3%. As the enterprises tend to think of their business in nominal terms, the acceleration of the growth measured that way from 1.1% last year in January - November up to 7.6% this year might be psychologically more significant than the real acceleration from 2.2% to 3.9%. That is why the overall optimistic mood in the sector is only natural.

More and more people think about increasing savings, not consumption

However, the storekeepers should not get euphoric, as the future may not be a paradise for them. The assessments of households on their financial situation during the coming 12 months and the risk of unemployment are more optimistic than on average previously. The readiness to make big purchases is also lower than on average previously. This is the element that influences trade turnover most of all as daily commodities are purchased anyway. Both life experience and the assessment of mood indicate that at the moment the increase of savings is more important for people than consumption. When the society becomes older, it gradually switches to risk averse behaviour. It should be added that retailers are not excessively optimistic - their mood, although being positive, is slightly below the average level during the last seven months. Moreover, next year merchants may be forced to increase salaries, at least in the central part of the country, where more than a half of economic activity takes place.

Latvian economy next year - exciting times ahead

The mood of the consumers is above the historical average level and it has not changed significantly during the last six months. We may hope that the next year it will continue to grow, as the level of unemployment is decreasing and the speed of changes during last year was gradually increasing. The feeling of risk to lose one’s job is the factor that influences the wish to spend money. According to the components of ESI indicator, all the big sectors or industry groups are planning to increase the number of employees. Moreover, during the latest months these indicators have rapidly grown in manufacturing and construction fields.

Events in Latvian economy next year will be bright; some of them even a bit frightening, but very favourable to consumption in the nearest future. If the salary raise is excessive and hinders the development in more distant future, the instant influence of the consumption is favourable anyway. Thinking of the probable events in the nearest future, one might wish to fasten the seatbelt securely, but undoubtedly the ride will be exciting.

Peteris Strautins
Economist
peteris.strautins@luminorgroup.com

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