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Swedbank: five hottest economic trends this in 2017 and 2018

Mārtiņš Kazāks/twitter.com.
This year for the world and Latvia’s economy has been a year of unexpectedly rapid growth with positive influence on state budget, as well as wallets of businesses and residents alike. Latvia’s growth rate in Q3 2017 (5.8%) was more rapid than expected. Although growth will become slower with time, Latvia will experience a rather rapid economic growth next year. Chief economist of Swedbank Latvia Mārtiņš Kazāks mentions five of the most topical economic trends in 2017 and 2018.

2017 for Latvia’s economy

Foundations are set for a tax reform

2017 passed in Latvia under a sign of massive tax reforms. Changes have helped reduce the tax burden, especially for recipients of low income. In addition, all income will be applied with a single basic tax rate, Kazāks said.

«Changes to corporate income tax have to parts: cancellation of advance payments and no more application of corporate income tax on undivided profits. The first will assist businesses during times of crisis and the second will hopefully motivate people to legalize their actual financial flow. In general, the tax reform promises to go in the right direction. Risks, however, are associated with proper application and the amount of bureaucracy involved. The government should learn to speak more clearly – one of the biggest problems is controversial and ambiguous communication,» the economist said.

Finally, we invest

After years of idling, investments have finally begun to grow. Rates already exceed 20%. This is the most rapidly developing sector in Latvia’s economy this year. After a deep crisis in the construction sector, growth is observed there again. This is one of the factors that will warm up the labour market even more, says Kazāks.

A warmer labour market

One of the most topical objects of discussions in 2017 has been the heated labour market, the economist admits. «The market is heated by growing demand for workers, negative demographic trends and lack of required skills. It is estimated that wage rise will have reached 7.5% growth this year. It is important to keep in mind that a significant portion of wage rise came from legalization effect.»

Inflation returns

Inflation returned alongside positive economic growth rates and wage rise in 2017, growing from 0% to 3%. Price rise was affected by higher excise tax, private income tax and more expensive energy resources. Prices increased for food, non-alcoholic beverages, goods and services associated with housing and transports. Although average income increase has been more rapid than price rise this year, residents’ purchasing power has grown and the influence of inflation has been experienced the most by residents with low income.

Crediting rates remain slow

We have yet to notice any noteworthy improvements for crediting volumes in 2017. The reason for this is residents’ cautious approach towards lending services and demand among businesses, although there are a number of new regulations that affect banks and their crediting freedom, the economist notes.


What will 2018 bring Latvia’s economy?

Growth will continue in global economy

«The global economy, though slowly, will continue growing. Latvia will experience this growth as well. Demand in the global economy will help increase export volumes. The main negative risks in the world will be associated with political and geopolitical aspects: specifically the increasing tension between USA and North Korea, Russia’s unpredictable policy, elections in Italy, Donald Trump’s controversial political rhetoric and Brexit,» predicts chief economist of Swedbank Latvia.

Labour market continues getting hotter

Kazāks says that matters that affect the labour market will remain topical next year. The market will continue getting hotter and wages will continue growing. «This applies not only to people employed in the private sector but also people employed the public sector, including healthcare. However, the problem of labour force deficit will become more serious. Wage growth will be close to 10% next year. Legalization will play a major role in this. But it will not translate into a tangible income growth.»

Pre-election murmur

With Saeima election coming closer and closer, it is unlikely politicians will have the courage to announce something brave and new. This means Latvia’s economy will grow next year, but without unpopular and needed reform surprises. And this means politicians are not likely to come back to reforms sooner than 2020. Until then, economic growth will be moderate and the desire to realize reforms and fix problems will be low, the bank’s economist predicts.

Inflation more rapid than this year

Kazāks predicts that inflation will grow from 3% this year to 3.5% next year. «It will be pulled up by excise tax rise, labour market’s heat and wage rise, as well as price rise in the world.»

Latvia’s economic breakthrough – slower, but continued

«Latvia will have sustainable economic growth next year. Exports of goods and services will remain the engine behind economic growth and it will be fuelled by powerful external demand. Investment activity will remain strong. Bigger or smaller benefits will be experienced by nearly all residents, as well as state and municipal budgets. Compared with seasons – although it will no longer be the spring breeze or July heat, we will still get a pleasant warmth in the second half of summer,» said Swedbank Latvia chief economist.


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