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In the global economy gradual recovery continues, especially in the US. The eurozone has also left its one-and-a-half-year crisis behind, yet there are concerns about China, where the pace of growth is slower than expected.

Global economic trends

Andris Strazds, the Senior Economist of Nordea bank, said, “Next year, growth in the US economy is likely to speed up. During the last four years, the burden of indebtedness on US households has decreased substantially, and currently household spending for the servicing of indebtedness is slightly above 10% of income, which is the lowest since 1980 when compilation of statistics of this type began. Unemployment in the US is decreasing. Also, the negative effect of public deficit reduction measures on demand will decrease in the coming years. This allows us to affirm with certainty that in the next few years, US growth will be more rapid than this year.”

“Moderately positive news has also been coming from the eurozone during the last few months. After a recession lasting one and a half years, in the second quarter of this year, the economy of the eurozone finally showed an increase of 0.3%. The growth was ensured basically by Germany and France, but the less-severe-than-expected economic recession in Italy and Spain also had a role to play. A very positive development can be observed in Germany, where the employment level has reached a record number and the actual income of households is increasing. Also, political uncertainty has decreased, and it is clear that Angela Merkel will continue to lead the country after the Bundestag elections on 22 September,” comments Strazds.

“As far as the Chinese economy is concerned, its growth is slowing down. The increase of both exports and local demand has been slower than expected. Considering that following the obvious signs of decreasing growth the government has not taken any new measures to stimulate the economy, it can be concluded that Chinese leaders are ready to allow a slower pace of growth in order to balance the economy in any noticeable way, the development of which has been previously driven mainly by exports and investments. It is clear that in the next years’ investments will grow slower than before, since China is already experiencing significant unused production capacities. According to the IMF estimates, the capacity utilisation in China is only around 60%, while it reaches 76% in the US and 86% in Germany.

Currently, the hard landing of the Chinese economy and increasing uncertainty in the Middle East and North Africa are among the most substantial global risks for the economies of the eurozone as well as Latvia. The only consolation is that if both of these risks were to occur simultaneously, they would partially neutralise each other thereby reducing the overall negative effect. The hard landing in China would pose problems for exporters in Germany, but at the same time it would also imply a lower demand for oil, thus bringing down oil prices. The substantial drop in oil prices globally would be further negatively affected by the hard landing in Russia, whose economic growth still depends, to a large extent, on oil and gas export revenue,” forecasts Andris Strazds.

As for Latvia, local demand has taken the driver’s seat instead of exports

“This year, the Latvian economy is developing slower than in the last two years, mainly due to the slow development of export demand. At the same time, local demand is continuing to grow steadily, with an increase in employment, income within the population, and a reduction in the negative effect of loan repayment on consumption. In the second half of the year, considering the slightly more positive developments in the economies of the eurozone and the countries of the Baltic Sea region, export demand could increase a bit faster, while under the influence of the rise in oil prices, local consumption could grow a little slower than in the first six months. Currently, Nordea forecasts that during the year economic growth will generally be slightly below 4% or similar to that in the first six months.

Next year, economic growth might be a little faster than this year as a result of both more intense export growth and individual positive effects of the introduction of the euro. For example, with the reduction of currency exchange costs, at least part of the additional funds could be shifted to consumption, and investments could also increase slightly. In the coming years, economic growth could be slower as, with productivity and revenues approaching EU averages, the time of simplified “copy-paste” solutions is coming to an end. At the same time, the outcome of the elections to be held next year could be unfavourable for further reforms in education, the judicial system and finance market, which are necessary for continuing the growth of competitiveness and revenue. It is very likely that the next government in Latvia might be similar to the current one in Lithuania. Regarding the Lithuanian government, an economist recently commented that the only positive trend was that the government did almost nothing of what the political parties composing it promised to do before the elections,” indicated Strazds.

Concerns about too rapid growth of non-resident investments are unjustified

“In the Latvian banking sector, capital adequacy indicators are high, and the amount of cash or liquid funds rate of 65% from short-term obligations may even be evaluated as excessive. The reduction cycle of the amounts of indebtedness, which has lasted for almost 5 years, is also gradually approaching an end. At the same time, stories about the expected inflow of billions into Latvia from Cyprus, which is now in financial difficulties, have turned out to be a mere myth. In the second quarter, deposits of non-resident private individuals and private companies in Latvia increased by less than 30 million lats. Also when looking at the increase of deposits in Latvia in the long term, we see that during the last ten years resident deposits have increased more sharply than the deposits of non-residents, and, at least for the time being, concerns about abnormally high growth in non-resident deposits are unjustified. At the same time, it can also be seen that the non-resident deposit balance is fluctuating more than that of residents, therefore, additional requirements from the regulator's side for those banks which serve non-residents are justified,” admits Andris Strazds, the Bank’s Chief Economist, in the latest Nordea Economic Outlook.