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Swedbank: US and Eurozone economies expect difficulties; Latvia expects growth

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Swedbank has drawn growth outlooks for Eurozone and USA downward pointing, whereas Latvia’s economic outlook has been increased 3.3%.

In spite of weaker exports, Latvia’s economy demonstrated its most rapid growth in the past seven years. This allows increasing Latvia’s growth outlook to 3.3% for 2019. Although growth will remain good, it will slow down when compared to last year’s heights, according to Swedbank economists. Growth will be limited by weak external demand, increased load on production output, growing shortage of workforce and pressure from costs, which will become more noticeable this year. Still, there are many external and domestic risks that could affect growth.

World economy stagnates due to trade conflicts and growing uncertainty

«International tension reduces work trade volumes and together with political uncertainty and market fluctuations create negative effect for global growth. I would seem the trade talks between USA and China may have a positive outcome. Nevertheless, talks continue and neither side has lifted their import tariffs. Increased trade tension between these two superpowers remains a serious risk. On top of that, recently USA has come with a proposal to impose an import tariff on one more product imported from Europe, and has successfully wound up concerns about global trade and growth. And especially high risk for Europe is the possibility of USA deciding to impose tariffs on Europe-made cars,» says acting Swedbank economist in Latvia Agnese Buceniece.

Swedbank notes that the worsening of processing industry’s indexes in most developed countries had begun last year and continues in the beginning of this year. Political uncertainty has affected the general mood of households and businesses, limiting their desire to invest. However, a strong labour market improves employment and income rise, supporting continuous growth in the service sector. This contributes to economic growth and at least partially compensates the weak contribution of producing industries.

The world’s economic growth continues slowing down, from 3.6% last year to 3.2% this year, economists predict. Although this will happen slightly faster than predicted in January, it is still expected the slowdown to be gradual and controlled. Last year, the US economy reached this business cycle’s most rapid growth rate and will slow down this year from 2.9% to 2.1%. Under influence of processing industry, growth in Eurozone will be only 1.2% (1.8% in 2018). However, risks remain on the highest level of recent years, and they may seriously reduce growth rates or even create a new recession.

Central banks have reacted to the worsening of growth tendencies, reporting that they will wait and maintain greater caution when increasing rates. Both the European Central Bank and the US Federal Reserve System will likely maintain a pause both this year and the next and keep base interest rates on the current level, thereby supporting economic growth. Eurozone also plans additional measures to support lending in the banking sector.

Powerful rise of investments and stable households’ consumption supports Latvia’s economy

In a time when the world economy remains in one place, Latvia’s economy demonstrates the most rapid growth of the past seven years, Swedbank economists say. Last year, Latvia’s economic growth was more rapid than the average in Eurozone and Baltic region.

Economic growth was observed in nearly all industries except for finance sector and electricity production. Three of the largest sectors of economy – processing industry, trade, transport and storage – had experienced a slight slowing of economic growth. But all this was more than compensated by a moderately more rapid growth in construction and ICT, comments Swedbank.

Strong domestic demand, especially in investment activity, was the engine of economic growth, the bank notes. Export, on the other hand, demonstrated weaker contribution. Until now, last year’s dry summer played a role slowing export growth. This drought was responsible for grains and colza export decline and weaker re-exports of equipment and beverages.

Eurozone’s problems have not affected Latvia much so far, because exports focused on the Baltic and Scandinavian region, as well as Russia, where growth was more stable. Although openness in the era of growing protectionism is a weakness, Latvia benefits from the fact that its export sector is relatively diversified country and product-wise. Another plus is that the general economic growth is more balanced than it was in 2006-2008, Swedbank experts say.

«Although Latvia’s GDP growth this year will be rather good, it will slow down from last year’s heights. We expect economy to grow 3.3% this year and 2.5% next year. Growth is limited by weaker external demand, historically high load on production output, growing shortage of labour force and pressure from growing costs, which will become more apparent. These factors together with slower EU fund investment growth will be reflected to a more moderate construction and investment growth, which was a strong impulse for last year’s growth,» comments Buceniece.

«Export orders’ increase has stopped on a high level, which points to the fact that we cannot hope for better results this year. If this year’s summer turns out better for farmers, we can expect some improvement for exports in the second half of the year. Household consumption will become the main driving force of growth, which will benefit from good mood of households and better purchasing power, and slower growth,» says Buceniece.

Unemployment is already on the lowest level of the past ten years, and it continues declining from 7.4% last year to 6.7% this year. Labour force shortage will contribute to average gross wage rise, although this year wages will lose their growth effect this year and will grow 7% (8.4% in 2018), the bank predicts.

Considering that inflation will remain at 2.5%, improvement of purchasing power will be slightly slower than a year ago. Wage growth will be slightly ahead of productivity, creating risks for profitability and competitiveness of companies, economists say.


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