Recent Macroeconomic Developments in Latvia

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This presentation summarises recent macroeconomic developments in Latvia and outlines a medium-term outlook for real GDP and inflation. Presentation reviews ongoing economic recovery, labour market …

This presentation summarises recent macroeconomic developments in Latvia and outlines a medium-term outlook for real GDP and inflation. Presentation reviews ongoing economic recovery, labour market issues and includes analyses on core factors behind the path of inflation. The main focus of the presentation is on the issue of competitiveness of the Latvian economy pointing to the costs adjustment process and productivity gains, as well as presenting export performance, market shares and current account developments. Presentation also features slides on monetary and financial market developments.

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  • 1. Recent Macroeconomic Developments in Latvia March, 2014
  • 2. Economic growth is expected to remain robust Real GDP growth (%) 8 8 7.1 7 7 6 6 4.9 5 4.6 5.3 4.6 4.3 4.5 3.8 4 3.5 3 1.7 1.6 1.2 1 4 4.0 4.0 3 2.2 2 5.2 5 2 1.2 0.7 0.7 1 0 0 2012 I II III IV q-o-q (s.a.) Source: CSB; F – Latvijas Banka forecast 2013 I y-o-y II III IV flash 0 2011 2012 2013 2014 F F
  • 3. In 2013, real GDP was driven by private consumption growth; further role of export is expected to return Contribution to real GDP growth (pp) and real GDP growth (%) 20 15 10 7.1 4.9 4.6 4.6 3.8 4.3 4.5 Q2 Q3 Q4 2013 Q1 Q2 Q3 5 0 -5 -10 -15 2012 Q1 Private consumption Public consumption GFCF Exports Imports GDP, % yoy Source: CSB 2013F 2014F Changes in inventories
  • 4. 2006'I III V VII IX XI 2007'I III V VII IX XI 2008'I III V VII IX XI 2009'I III V VII IX XI 2010'I III V VII IX XI 2011'I III V VII IX XI 2012'I III V VII IX XI 2013'I III V VII IX XI Manufacturing is gaining strength Volume index of manufacturing (2010=100) 130 125 120 115 110 105 100 95 90 85 80 Source: CSB
  • 5. Unemployment dropped by 3.1 pp to 11.9% in 2013 Registered unemployment and job seekers rate (% of economically active population) 22 21.3 18.7 18 14 11.3 10 9.8 2008 I III V VII IX XI 2009 I III V VII IX XI 2010 I III V VII IX XI 2011 I III V VII IX XI 2012 I III V VII IX XI 2013 I III V VII IX XI 2014 I 6 Job seekers rate (real unemployment; CSB) Registered unemployment (SEA) Source: Registered unemployment: State Employment Agency (SEA) data; Latvijas Banka staff adjustment of historical (pre 2012 IV) data in line with the results of 2011 Population Census. Job seekers rate: Central Statistical Bureau of Latvia data (adjusted for the 2011 Population Census).
  • 6. Wage growth is broadly in line with labour productivity Real wage and productivity index (historical average = 100) 130 120 110 100 90 80 70 Labour productivity per hour worked Real hourly wage Source: Central Statistical Bureau of Latvia data; Latvijas Banka calculations Q3 2013 Q1 Q3 2012 Q1 Q3 2011 Q1 Q3 2010 Q1 Q3 2009 Q1 Q3 2008 Q1 Q3 2007 Q1 Q3 2006 Q1 Q3 2005 Q1 Q3 2004 Q1 Q3 2003 Q1 Q3 2002 Q1 Q3 2001 Q1 Q3 2000 Q1 60
  • 7. Increase of Latvian export market share reflects gains in competitiveness Merchandise export shares in world import (2002=100) 260 Bulgaria 240 Czech Republic 220 Estonia 200 Hungary 180 Latvia 160 Lithuania 140 Poland 120 Romania 100 Slovak Republic 80 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: WTO, Latvijas Banka calculations Slovenia
  • 8. Export of machinery, wood and food products have the largest contribution to export growth; one-off effects determined export growth deceleration Group's contributions to the y-o-y growth of merchandise export (pp) and average nominal export growth (%) 20 15.7 % Others Transport vehicles 15 Machinery and electrical equipment Base metals 10 1.5% Building materials Textiles 2.2 5 1.6 1.2 0 Paper Wood Plastics Chemical Mineral products Food -5 2012 Source: CSB Latvia, Latvijas Banka calculation 2013 Agricultural
  • 9. Import deceleration largely reflected moderation of investment activity Merchandise import (I 2011 = 100) 250 230 Capital goods (13%) 210 190 Intermmediate goods (50%) 170 150 130 Consumer goods (27%) 110 90 70 Passenger cars and motor fuel (3%) Avots: Eurostat XI IX VII V III 2013 I XI IX VII V III 2012 I XI IX VII V III 2011 I 50
  • 10. Moderate current account deficit is seen sustainable for Latvia Current account main positions (% of GDP) 15 10 10 5 5 0 -5 -3.9 -3.9 -2.2 -0.4 0.8 -2.1 0.5 0 -3.0 -0.9 -10 -15 -2.5 2011 -5 -2.2 2012 -10 -20 2012Q1 Q2 Q3 Q4 Income Current transfers Services Goods Source: Latvijas Banka, LB GDP forecast 2013Q1 Q2 Q3 Q4E -15 current account 2013E
  • 11. In 2013 FDI inflow in Latvia was 2.7% of forecasted GDP FDI inflow in Latvia (% of GDP) 7 6.8 6 5.6 5.3 5.1 5 4.6 4.1 4 3.9 3.5 2.8 3 3.0 1.7 2 1.1 1 0 Source: Latvijas Banka IV III II 2013 I IV III II 2012 I IV III II 2011 I -1
  • 12. External debt as a proportion of GDP has been declining Gross and net external debt (% of GDP) 170 65 165.7 60 160 59.1 55 150 Gross External Debt % of GDP Left Axis) 50 133.8 140 45 130 40 120 34.5 35 30 110 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2007 2008 2009 2010 2011 2012 2013 Source: Latvijas Banka Net External Debt % of GDP (Right Axis)
  • 13. With smaller impact of global prices and sustainable wage–productivity growth the annual average inflation in 2013 was record low Impact of food and energy prices on total inflation (%-points) and the annual inflation rate (%) 4 3 Annual average inflation (HCPI): 0.0% in 2013 1.7% in 2014 (Latvijas Banka forecast) 2 1 0 -1 -2 I 2012 Food III V Energy VII IX XI Inflation (yoy) I III V VII IX XI 2013 Inflation excluding food and energy (yoy) Source: Central Statistical Bureau of Latvia, Latvijas Banka staff calculations I 2014