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Saturday, 27.04.2024, 06:25
Growth shifting into higher gear in Latvia in 2017
High rates as such are quite characteristic of a
country where the level of income is significantly different from the regional
average, e.g. that of the European Union (EU). The given rate is also logical
considering the comparatively low base from which growth rebounded. It is also
quite far from what was seen during the economic upsurge. At the same time, the
rising growth signals several important things to the economic policy-makers.
On the one hand, the acceleration of growth
should be viewed as a cyclical recovery from the low levels observed in the
previous years, on the back of the strengthening of both the external and
domestic demand. A significant role is played by the external environment which
has improved and has encouraged exports. The problems with the absorption of
the EU funding that were dampening investment last year have also been largely
resolved at the moment. As a result, several sectors are developing quite
successfully, including construction which receives a positive contribution
also from EU funds non-related projects.
Just like last year and in the first quarter of
this year, the growth of private consumption remains steady. Wages have
increased quite considerably, thereby supporting the return of the growth of
the real net wage, previously experiencing a short-lived drop, to the average
level of the previous year already in the second quarter. Moreover, the
recently published data on wage growth by the Central Statistical Bureau of
Latvia (CSB) point to more substantial rises in most of the sectors.
The consumer sentiment indicators, released by
the European Commission (EC), are also more optimistic than at the beginning of
the year. What we see is clearly not the development of a lending or consumption
boom. Although retail trade reports higher sales of household equipment related
goods, the overall growth of the sector so far is even lower than two years
ago.
Consequently, the acceleration of growth should
be overall viewed as a positive thing, suggesting that the recovery from the
post-crisis period of low growth has finally shifted into a higher gear and is
becoming increasingly more broad-based. It also means that good times have set
in for the economy and this should trigger the build-up of precautionary
savings in the government budget for the case of a potential future economic
downturn, which would also be a step closer to a balanced budget.
Yet, on the other hand, higher growth
unfortunately brings along some not so positive effects. What is worrying is
that signs of imbalances have emerged even at the current considerably moderate
growth rates.
· - First of all, like my colleague already wrote, there are signs of overheating on the labour
market and the wage growth is already far higher than productivity growth.
· -
Second, the productivity growth is dampened by the low level of investment.
Looking at investment, it has to be noted that the industrial capacity
utilisation remains at a historically high level, similar to that observed
during the impressive pre-crisis development period. This suggests that further
growth requires investment. At the same time, the contribution of gross fixed
capital formation (investment) to GDP is considerably below the historical
highs. Being over 30% in the pre-crisis period, it failed to reach even 20% in
the first half of this year. It will be difficult to raise the productivity
without further investment, and the sluggishness of the productivity growth has
already become a challenge in the context of maintaining competitiveness.
This means that, although the demand has finally
started to recover and lay the foundation for further growth, restrictions on
the supply side can become a significant obstacle for the economic development.
In other words, structural reforms are becoming increasingly more important, so
that the leap in GDP growth does not end as quickly as it began and the
businesses do not lose competitiveness due to the tightness of the labour
market already in the coming years.