Strautins: Latvia’s economy will grow more quickly but less equally

In the next couple of years, economic growth rate will no longer be representative of what happens in different components that form Latvia’s economy – regions and industries, notes DNB Bank’s economic expert Peteris Strautins.

According to him, differences between successful development centres and other territories will become sharper. Riga is one development centre. However, it is not the only one in Latvia. Development of different industries will differ from one another rather greatly.

Exports of products and services with high added value will ‘feed’ the development of financial mediation, IT and communications and business services. Exports of computer services had grown 30% in the first nine months of 2015. Growth of financial services is estimated at 14%. Tourism-related sectors of Latvia’s economy – hotels and restaurants, entertainment and leisure businesses – are expected to grow as well. Latvia’s processing industry will likely exceed average growth rates as well. Although this particular industry is often associated with the state of endless crisis, healthcare in Latvia has grown more than the economy in general over the past three years. Increase of income and medical tourism provides ample room for development in the future. Due to severed inflow of finances from European funds, construction sector may suffer a crisis next year. The unclear future of Latvia’s transit industry prevents experts from giving any predictions.

In comparison with Q3 2009, the total number of filled jobs in Latvia has grown by 12.3% in Q3 2015. Sectors in which average wages exceeded EUR 1,000 experienced the biggest increase in the number of available jobs – 16%. This does not apply to state administration, where the number of jobs actually decreased. A look at industrial and service sectors, mainly pharmacy, mechanical engineering, business, financial and IT services, arts and entertainment and others, experienced the biggest increase in employment this year: 31.6%. These industries are represented the most in Riga – their presence in the capital reaches 80%. With that, the majority of newly-created jobs in Latvia were provided by well-paid, intellectual and creative industries located mostly in the capital.

«Structural changes applied to the economy after the financial crisis have definitely benefited the capital and its region. It is possible to resist this tendency with politics. However, it is important to mind the limits of such options. There is a risk of slowing down growth in Riga without providing any positive results for the rest of Latvia. Tax discounts and investments in infrastructure cannot hope to compensate the effect of variety of available knowledge and specialized skills on Riga’s labour market. Reduction of Riga’s competitiveness in favour of other regions would only harm our capital’s image and attractiveness in Europe. It is possible to help other development centres to grow. But it is also highly important to choose the tools for this job. There are at least ten towns in Latvia that offer good conditions for the development of processing industry. There are also forms of businesses we cannot possibly hope to force on locations with small populations,» – said the bank’s expert.

«Unavoidably unequal development in different parts of the country does not mean an increase in income inequality. Residents of other regions will have more and more opportunities to relocate to development centres in the near future. Construction of new homes will be a factor that is expected to grow in importance. It will not be the only factor, however. Because of the drop in birth rates registered in the 90s, the change of generations in development centres will likely free up more homes for potential workers from regions with high unemployment rates,» – added Strautins.

«Latvia’s economy will remain in the comfort zone between overheating and overcooling next year. Next year’s risks are definitely aimed at overheating. One of the reasons behind that will be increase of consumption – it will become stronger in 2016. Investments are one of the factors that are the hardest to predict. This is because there are positive and negative aspects to it. Savings of enterprises have reached the highest point and have exceeded the pre-crisis level by 34%. […] One negative condition is the uncertainty in regards to EU funds. There is no doubt that household investments will grow. This is demonstrated by recent lending trends and results of consumer mood indexes that reflect their intentions to buy, build or repair homes. The latter seem especially aimed at growth. Export has been the main driving force for economic growth lately. Its growth next year will be close to GDP growth. However, structural changes should be in the focus next year. Not all exports are the same; some have a big influence on income. The best results are expected from exporting sectors that use up a small portion of imports,» – said Strautins.

BNN 

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