Although income growth, low inflation, the turning of interest rates in a downward direction, as well as more concrete outlines for minimum wage increases in the coming years, have gradually improved the mood of economic participants, including households and retailers, consumers are probably more inclined to restore or increase the level of savings, Paula thinks .
Certain indicators led economists to think about a slight revival of the economy in the third quarter – the results of sentiment surveys until September, as well as the data of some sectors, such as retail trade and industry, for the months of July-August. However, the industry’s driving force was power generation, which saw the support of favorable gas prices, which allowed more power to be produced in cogeneration plants. Paula believes that the effect of such a factor might not be permanent.
Card payments abroad are growing faster than domestic ones
On the other hand, the positive dynamics of retail sales in July-August was short-lived, and the enthusiasm was not sustained – a decline was observed in September. Paula explains that in the third quarter, the most significant contribution to the increase in the real turnover of retail sales was made by sales in grocery stores, as well as fuel retail sales.
Paula explains that there is a tendency for card payments abroad to grow faster than domestic ones, which indicates a change in habits and makes one think about the need for structural adjustments to the business model in the development of the industry.
The economist points out that in conditions of uncertainty, consumers see the motivation to save, and the activity of private investments is low. Also, the dynamics of the government’s capital expenditures in the first nine months of the year show a very distant path from the previously set goals – the progress of large projects is sluggish.
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The economist of the Bank of Latvia believes that the foreign market will most likely not wake up from hibernation in the winter – the challenges of competitiveness in the form of both structural and labor costs are not only topical for Latvia, but also for the eurozone. Similarly, the further development of geopolitical developments and the expectations of the results of the US presidential elections make economic participants hold their breath a little before the next step, that is, before a new investment or consumption decision.
October inflation data may be decisive
Economist Dainis Gašpuitis of “SEB banka” explains that the audit of previous national accounts data has changed the view of what is happening in the economy this year, including in 2023. According to the latest data, the economy grew by 1.7% last year, against the previously reported contraction of 0.3%. As a result, the basis for data fluctuations this year has been created.
According to the rapid assessment of the Central Statistical Office (CSB), in the third quarter, Latvia’s gross domestic product (GDP) decreased by 2.4% during the year. GDP was affected by the decline in manufacturing sectors by 4.1% and in service sectors by 2.3%. 1.3% less product taxes were collected. The depth of the growth decline in the third quarter by 2.4% was created by the rapid growth last year, which reached 3.6%. Therefore, Gašpuitis admits that the situation will not show such a gloomy picture in the fourth quarter.
The performance of the three quarters of this year shows that the economy has decreased by 0.7% and will end the year with a decrease of 0.4%. Gašpuitis explains that these data do not change the overall picture, which shows that the expected recovery in the second half of the year is delayed. This is due to the still weak external environment, under the influence of which the decline continues in exports and manufacturing industry.
The economist says that the October PMI index of the Eurozone confirms the weak growth of the Eurozone, and the October inflation data will determine whether the European Central Bank (ECB) will cut the interest rate not by 25 but by 50 basis points in December to strengthen support for the economy.
Economic Shenanigans with a Twist of Comedy
Ah, the economy! A realm where numbers dance, and poor decision-making pirouettes like an uncoordinated flamingo on roller skates. According to our esteemed economist Paula—who sounds like someone you’d meet at a party and desperately try to avoid—the mood among economic participants is *gradually* improving. Now, don’t rush out and pop the champagne just yet, because as Paula notes, consumers are still more inclined to stash away their cash than throw it in the nearest wishing well.
The Resurgence of Caution
Paula observes that while sentiment surveys and retail data from the sunny months of July and August hinted at a tiny revival, we shouldn’t hold our breath—unless you’re into extreme sports and want to test your resilience. The real hero here seems to be our good old friend, power generation, which reportedly got a boost from “favorable gas prices.” Favorable? I imagine that’s code for “cheaper than a pint at the pub after a tough week.” But just like that one relative who shows up to every family gathering and eats all the snacks, this boost might not stick around forever.
Card Payments Abroad: A Side Quest
Now here’s a twist—card payments abroad are apparently on the rise, outpacing their domestic cousins. It’s a bit like realizing your favorite band is spilling over into foreign territory, and suddenly you’re questioning your own tastes. According to Paula, this indicates a change in consumer habits. Well, what do you know? Looks like our wallets are gaining an adventurous spirit, while domestic spending curls up on the couch in its pajamas, binge-watching Netflix.
Investment Anxiety: The Economic Cliffhanger
Now, in true dramatic fashion, Paula reveals that consumers, faced with uncertainty, are clutching their savings like a toddler with a beloved teddy bear. Meanwhile, private investments are about as lively as a damp squib. It turns out, government spending hasn’t picked up the pace either—kind of like waiting for that special someone who’s always running late. So, we might as well throw in a “come on, government!” chant while we’re at it!
Winter is Coming: An Economic Tale
The economist from the Bank of Latvia thinks the foreign market will stay in hibernation this winter—like a bear but without the cozy flannel. Sounds comfy, doesn’t it? But he encourages us to keep an eye on the unfolding geopolitical landscape and the upcoming US presidential elections, which will make every economist hold their breath like they’ve just seen a particularly twisty roller coaster.
October’s Economic Showdown
Now let’s get to the juicy bits! Dainis Gašpuitis from “SEB banka” has an appraisal of our economic highs and lows. It seems last year, we were boosting our GDP by a smashing 1.7%—definitely better than the initially reported slap of -0.3%. What a twist! But then, we entered this year’s third quarter with an alarming drop in GDP of 2.4%. Manufacturing and services crumbled like a poorly baked soufflé. And just when you thought things couldn’t get worse—who doesn’t love a little tax adjustment?
The Crystal Ball of Economic Predictions
Gašpuitis wraps it up with an exciting cliffhanger: October’s inflation data might just be the deciding factor for the European Central Bank’s next move. Do they cut interest rates by 25 or 50 basis points? It’s like waiting for an announcement at a talent show. Will it be a graceful pirouette or a less-than-stellar face plant? The anticipation is palpable!
Despite income growth, low inflation, and recent decreases in interest rates, the economic sentiment among households and retailers appears to be improving steadily. Paula indicates that alongside these positive developments, there are clearer proposals for minimum wage increases on the horizon. However, consumers seem more inclined to focus on restoring or boosting their savings levels during this period of gradual economic optimism.
Certain indicators throughout the economy have prompted economists to speculate about a modest revival in the economic activities during the third quarter. This optimism is supported by positive sentiment survey results up to September and encouraging data from various sectors, particularly retail and industry for the months of July and August. Notably, a significant boost in power generation was driven by favorable gas prices, which have empowered cogeneration plants to produce more energy. Nonetheless, Paula expresses caution, suggesting that this beneficial trend may not be sustainable in the long run.
Card payments abroad are growing faster than domestic ones
Conversely, the previously positive momentum in retail sales during July and August proved to be short-lived, with a noticeable downturn occurring in September. Paula notes that in the third quarter, grocery stores and fuel retail sales contributed significantly to the rise in real turnover within retail sales.
Paula points out an emerging trend: card payments made abroad are increasing at a faster rate compared to those made domestically. This shift in consumer behavior suggests a need for businesses to consider structural adjustments in their operational models to adapt to the evolving market landscape.
In an environment characterized by uncertainty, Paula emphasizes that consumers are increasingly motivated to save rather than spend. Private investment activity remains lackluster, while the government’s capital expenditure dynamics in the initial nine months of the year indicate a significant deviation from previously established targets, coupled with sluggish progress on major projects.
The economist from the Bank of Latvia anticipates that the foreign market is unlikely to rebound during the winter months. The pressing issues of competitiveness, particularly regarding structural and labor costs, pose challenges not only for Latvia but for the entire eurozone. Additionally, geopolitical developments and the anticipation surrounding the upcoming US presidential elections are prompting economic stakeholders to adopt a cautious wait-and-see approach before making new investment or consumption decisions.
October inflation data may be decisive
Economist Dainis Gašpuitis from “SEB banka” notes that revisions to previous national accounts data have altered perceptions regarding the economic landscape of 2023. The latest figures indicate a surprising 1.7% growth in the economy last year, a significant improvement from the previously reported contraction of 0.3%. This adjustment creates a new context for evaluating fluctuations in the current economic year.
According to a rapid assessment by the Central Statistical Office (CSB), Latvia’s gross domestic product (GDP) experienced a year-over-year decline of 2.4% in the third quarter. This downturn was influenced by a 4.1% drop in manufacturing sectors and a 2.3% decrease in service sectors, alongside a 1.3% reduction in product tax collections. The sharp decline observed in the third quarter is partially attributed to the rapid growth experienced last year, which peaked at 3.6%. Therefore, Gašpuitis indicates that the fourth quarter’s outlook might not be as bleak as initially feared.
The aggregate data from the first three quarters of the year suggest that the economy has contracted by 0.7% and is projected to conclude the year with a decrease of 0.4%. Gašpuitis clarifies that these figures do not fundamentally alter the broader economic narrative, which reflects a postponed recovery anticipated in the latter half of the year, largely fueled by a persistently weak external environment impacting exports and the manufacturing sector.
The economist asserts that the October Purchasing Managers’ Index (PMI) for the Eurozone corroborates the sluggish growth patterns observed across the region. Furthermore, the upcoming inflation data for October could play a critical role in determining the European Central Bank’s (ECB) interest rate decisions, potentially leading to a reduction not of 25 but rather 50 basis points in December, aimed at bolstering economic support.
