Evaluation of the growth of Latvian economy in 2017 and forecasts for 2018

02-01-2018

Growth of the Latvian economy was considerably faster in 2017 than in the previous years. The gross domestic product (GDP) grew by 4.5% in 2017. The acceleration of growth in 2017 was fostered by the improvement of the situation in the external environment, more intensive investments from EU Structural Funds and increase in wages.

 

Export, private and public consumption have been growing stably over the last years. Export volumes have reached the highest-ever level. Export was positively affected by the increase in external demand. Export grew by 4.1% in three quarters of 2017, compared to the three quarters of 2016. Furthermore, tangible improvements in the labour market and the increase in personal income fostered an increase in private consumption. Private consumption grew by 4.9% in three quarters of 2017. Public consumption in this period also increased considerably – by 4.5 per cent.

 

After the fall in the two previous years, in 2017, rapid growth was observed in investments. It grew by 18.5% in three quarters of 2017, thus promoting a rapid increase in construction volumes by 18.6 per cent.

 

Strong growth in manufacturing promoted by the ability of businesses to enhance competitiveness and the demand dynamics on the largest export markets – EU and CIS countries – is particularly gratifying. Manufacturing grew by 8.5% in three quarters of 2017, compared to the same period of 2016. An increase was observed in all the largest manufacturing sub-sectors. Mechanical engineering and manufacture of electrical and optical equipment has grown the most. The chemical industry, manufacture of non-metallic mineral products and metalworking developed rapidly. A stable increase was also observed in the largest manufacturing sectors – food and woodworking.

 

In three quarters of 2017 a rapid increase was also observed in transportation and storage (by 7.5%), where growth was driven by growing carriage of goods by road, as well as growing numbers of passengers in airports and sea ports. Other manufacturing was also developing rapidly – mining, electricity, gas supply, heat supply and water supply – (total increase by 11%). A tangible increase was also observed in the journalism and information industry, which grew by 4.8% in this period fostered by a rapid increase in computer programming and information services. Public services grew by 5.1%. Growth was slower in trade and accommodation (by 3.9%) and other commercial services (by 1.9). Furthermore, value added in agriculture, forestry and fishery grew by one per cent.  

 

Taking into account the favourable atmosphere – economic growth in EU countries, which is the largest market outlet for Latvian goods, as well as available investments from EU funds – growth will remain stable also in 2018, and the GDP increase according to forecasts of experts of the Ministry of Economics might reach 4.2 per cent.

 

The fastest growth rates in 2018 are expected in manufacturing and construction. Thanks to the favourable situation in the external environment, the chemical industry, manufacture of electrical and optical equipment, manufacture of machinery and equipment, as well as manufacture of vehicles will continue to grow stably. Also, thanks to the rise in private consumption, retail trade and commercial services keep growing stably. With the budget expenditure growing, the volume of public services provided will also increase.

 

The main current economic challenges arise from developments on the labour market – the number of free working hands reduces putting pressure on wages and affecting competitiveness of manufacturers on external markets.

 

The rates of participation and employment of the population have reached the highest historical marks – the rate of participation of the population in Q3 2017 was 69.1%, but the employment rate – 63.3%, which tangibly exceeds the pre-crisis achievements. The employment rate has grown by 1.8 percentage points within a year, while the rate of participation of the population – by 0.7 percentage points.

 

Along with the increase in demand and the drop in supply of labour force, unemployment also keeps falling sharply. The number of job seekers in Q3 2017 shrank by 10.4 thousand compared to Q3 2016, but the unemployment rate – by one percentage point and was 8.5%. A more rapid decline in unemployment is still delayed by the large share of long-term job seekers (2/5 of the unemployed), as well as regional differences on the labour market – differences in the unemployment rate in Riga and Latgale regions still amount to nearly ten percentage points, which, combined with low geographic mobility of labour force, increases the risks of structural unemployment.

 

Strong pressure from the demand side on the labour market is expected to continue in 2018, which could be reflected in a small increase in the number of employees. At the same time, the labour market will continue to be affected by negative demographic trends and regional labour market differences. In view of this, the situation with the availability of labour force will become even more complex in the near future, and will have a tangible effect on wage dynamics and labour costs. In 2018, the average gross wage is expected to exceed 1,000 euro (it was 925 euro in Q3 2017). Meanwhile, the unemployment rate could fall by 8 per cent on average in 2018.

 

The only way to ensure growth in a situation where labour force is shrinking is to increase economic productivity, or, in other words, to promote economic transformation. It is therefore necessary to systematically continue work on the implementation of the objectives set out in the Government Declaration – stimulation of export and investment, promotion of productivity gains and human capital development.

 

Reforms in the education system and restructuring of the labour market are particularly important in the establishment of a sustainable model in order to prepare and adapt to structural changes. Ongoing reforms in the education system should be pursued with the emphasis on strengthening the quality of learning of exact and natural sciences in basic education and secondary education and on the development of adult education.

 

One of the priorities of the Ministry of Economics is the improvement of the business environment. Targeted reforms and close cooperation with the business community has enabled Latvia to achieve high results in the World Bank’s “Doing Business 2018” study. Latvia ranks 19th in competition among 190 countries. In turn, Latvia holds the 8th place among EU Member States. The vision of the Ministry of Economics is to create an excellent business environment and to move towards an innovative economic model. We have therefore defined five priority action lines for the further improvement of the business environment: strengthening the rule of law, developing customer-oriented public administration, digitisation of public services, openness of the business environment and increasing the competitiveness of the tax system.

 

To achieve the objectives set, the Ministry of Economics will continue creating a dialogue with entrepreneurs, non-governmental organizations, and other members of the public also in 2018. Only in this way sustainable growth can be sustained in the long-term.

 

 

Public Relations Division

Ministry of Economics

Latvia

prese@em.gov.lv

Last update:    22-03-2018