The Latvian EconomyMonthly newsletter from Swedbank’s Economic Research Departmentby Lija Strašuna No. 7 • 14 September 2011Household incomes rise – to consume or to save? • The labour market continues improving – employment and wages are rising, while unemployment is decreasing despite a higher activity rate. The purchasing power of households is thus improving slowly, even accounting for tax rises and inflation. Consumer optimism has been increasing. The improvements, though, remain very uneven across different segments of society. • This improvement is resulting in private consumption growth. Rising consumer loans and emigrants’ transfers are also stimulating household spending. Another likely factor promoting consumption is income tax evasion. Unfortunately, the household savings level remains very low, and the savings rate most likely diminished in 2010- 2011 after rising in 2008-2009. Although the economy has become more resilient, households remain exposed to a negative shock to the economy. • Economic growth will slow, undermining job creation. Consumer confidence is likely to worsen as well, hindering the bargaining power of employees and, thus wage growth, and increasing precautionary savings. Given the growing uncertainty globally and locally, it is extremely important to build up ”safety cushion”, and the challenge for households is to find the right balance between consumption and savings. for first-necessity items, thus hurting more thePurchasing power started to increase… purchasing power of poorer households.The labour market situation continued to improve in Real net wage bill, annual growth (%)the second quarter of 2011. Employment grew byan impressive 3.3% in annual terms, or 30 40thousand persons. Wage growth accelerated as 30well – the average net wage was by 5% higher than 20a year ago. 10The ratio of full-time equivalents (FTEs) to occupied 0posts1 (i.e., the work load) also rose. Overall, after -10taxes and inflation, the total wage bill (i.e., theaverage wage multiplied by the number of -20employed FTEs) grew in the second quarter of -302011 by nearly 3% in annual terms. The purchasing -40power of households is thus increasing. 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 Real net wageThe number of those seeking jobs continued to Work load (FTE/occupied posts)decline, although more slowly in the second quarter Occupied posts Real wage bill (FTE*real net wage) Source: CSBLof 2011 due to higher activity rate. However, theunemployment rate remains high – at 16.2%, Furthermore, out of 30 thousand newly employedaccording to the Labour force survey. It should also during the last year, 3400 were involved in activebe taken into account that price growth is stronger labour market programs (ALMPs) and are thus employed only temporarily. The extent of wage growth and job creation varies considerably across1 This is the measure of employment. As defined by the Central industries and across positions. Wages are raisedStatistical Bureau of Latvia (CSBL), an occupied post is a paid more through bonuses than as a regular part ofpost to which an employee has been assigned. The source is remuneration, and there are more opportunities forbusiness statistics (which also provides FTE data). Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46 8 5859 1000. E-mail: firstname.lastname@example.org www.swedbank.com Legally responsible publisher: Cecilia Hermansson, +46 8 5859 7720. Mārtiņš Kazāks, +371 6744 5859. Lija Strašuna, +371 6744 5875. Dainis Stikuts, +371 6744 5844.
The Latvian Economy Monthly newsletter from Swedbank’s Economic Research Department, continued No. 7 • 14 September 2011raises in exporting and export-related sectors, Consumer confidence and net wage dynamicswhere the financial situation of businesses is better. 80 60Employment and unemployment, thousand persons 40 50 24 20 25 12 0 -20 0 0 -40 -60 -25 -12 2006 2007 2008 2009 2010 2011 Average net wage, annual growth (%) Unemployment expectations over next 12M Source: -50 -24 Inflation expectations over next 12M DG ECFIN, 1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 Consumer confidence, total CSBL Change in ALMP participants* * Data available for Change in employment 2010 onwards only Job-seekers rate, % (rs) … promoting consumption Source: CSBL Rising incomes and optimism stimulated privateTherefore, the average numbers do not necessarily consumption growth in the first half of this year. Formean improvements for the majority of employed. instance, in the first seven months of 2011, theFor instance, a recent survey by Fontes (a seasonally adjusted retail trade turnover (withoutconsulting firm) showed that, out of every ten motor vehicles) in real terms was 2.5% higher thanemployees, three saw wage increases during the a year ago. In July, it was up by nearly 7% overlast year, two saw wage decreases, and five saw no December 2010. The turnover of cars andchange in wages. motorcycles is also growing fast, although from very low levels and partly due to the activity ofJob seekers by duration, thousand persons non-residents. 250 10 Retail trade turnover (s.a., constant prices), 2007=100 200 8 110 150 6 100 90 100 4 80 50 2 70 60 0 0 1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 50 >12M Lost hope finding a job, % of total 6-11M inactive/discouraged (rs) 40 <6M Source: CSBL 2005 2006 2007 2008 2009 2010 2011 Food Non-food Total (w/o motor vehicles) Source: CSBLOverall, the positive labour market developmentshave also brought improvements in consumer Of course, the labour market is not the only sourceconfidence. First, unemployment expectations have of improvements in private consumption. Banks arefallen notably. Second, the participation (or activity) slowly becoming more active in issuing loans. Outrate increased in the second quarter of 2011, not of LVL 65 million (EUR 92.5 million) in newonly because students and pensioners became household loans issued to residents in the first halfmore active, but also because the share of those of the year, 35% were consumer loans (of the totalwho have lost hope of finding a job fell. As a result, credit stock for resident households, consumerthe number of short-term unemployed (less than a credit accounts for only 20%).month) increased somewhat, thus reducing theshare of long-term unemployed (more than one Indications are that emigrants are continuing toyear). send money back to their relatives. These data 2 (4)
The Latvian Economy Monthly newsletter from Swedbank’s Economic Research Department, continued No. 7 • 14 September 2011cannot be distinguished effectively from other rising along with incomes, while term deposits aretransfers in the balance of payments; however, falling. This can be at least partly explained by the“other current transfers” (not involving the very low interest rates – the weighted-averagegovernment, i.e., except for EU funds) to Latvia interest rate for short-term deposits in the first halfincreased by 19% in annual terms in the second of 2011 was about 0.4% for lats and 1.2% for euroquarter of 2011. We believe that at least part of this (i.e., significantly below inflation). Households thusincrease is due to transfers of emigrants to their have a motivation to spend their money, buyfamilies. assets, or invest in alternative financial instruments, rather than deposit it. In addition, if a personIt should also be taken into account that not all receives an “envelope wage”, it might be easier forincomes appear in official statistics due to tax him/her to save “under the mattress”.evasion (“envelope” wages and informal/illegalemployment). Tax revenues as a percent of GDP Household deposits, LVL mare continuing to decline in 2011 (28.1% in the first 3500quarter vs. 29.6% a year ago, on an accrual basis)even despite tax hikes; this indicates a possible 3000increase in tax evasion, which is likely to supportconsumption as well. At the same time, “envelope 2500wage” growth is very unlikely to be stronger than 2000official wage increase. 1500Savings rate seems to decline again 1000The household savings rate increased notably in2008-2009, to 5% and 9% of disposable income, 500respectively. Data for 2010 are not yet available, 0but the Bank of Latvia estimates suggest that it 2005 2006 2007 2008 2009 2010 2011decreased to about 3%.2 It seems that in the first Overnight Short term Long term Source: Bank of Latviahalf of 2011 households were also more prone toconsume rather than save. With incomes andoptimism rising, so also did householdconsumption, while deposits have been largely Weighted average interest rate for deposits, %stable since the beginning of the year. In the first 14half of 2011, household deposits grew by just 0.3% 12in annual terms (2.5% in 2010). 10Household savings and debt ratios, % 8 140 14 6 120 12 100 10 4 80 8 2 60 6 0 40 4 1Q 04 1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 20 2 LVL, long term LVL, short term 0 0 EUR, long term EU R, short term -20 -2 Source: Bank of Latvia, CSBL -40 -4 -60 -6 2002 2005 2008 1H 11 The level of savings of Latvian households remains Gross savings rate (rs) Bank deposits/income very low. A survey by the Swedbank Private Gross debt-to-income ratio Bank loans/income Finance Institute showed that only 46% of Source: Eurostat, FCMC respondents have some savings (78% in Estonia and 61% in Lithuania).3 In addition, in most casesOf course, the fact that deposits are not growingdoes not necessarily mean that people are notsaving. It can be seen that overnight deposits are 3 http://www.manasfinanses.lv/2011/06/16/latvija-zemakais-2 Bank of Latvia (2011), Macroeconomic Developments iedzivotaju-uzkrajumu-limenis-starp-baltijas-valstim/ (inReport, July 2011. Latvian) 3 (4)
The Latvian Economy Monthly newsletter from Swedbank’s Economic Research Department, continued No. 7 • 14 September 2011the sums do not exceed EUR 1000, which Taking into account the increased uncertaintyconstitutes roughly two months’ average net wages. globally and also locally, it is very important that households find the right balance betweenThe ratio of household loans to deposits, although consumption and savings. Unfortunately, althoughhaving fallen somewhat, is about 1.9 – households Latvian economy has become more resilient,owe nearly twice as much as they hold in deposits. households remain very vulnerable if a negativeFor comparison, the corresponding ratio is 1.6 for shock hits the economy.Estonia and 1 for Lithuania. In addition, thedistribution of deposits is heavily skewed towardsthe most affluent part of the society, while thosewith small and medium incomes are building upsignificantly smaller deposits. Lija StrašunaWhat next?Export and investment growth is expected to slowdue to slower global growth. As a result, Latvia’seconomic growth will decelerate as well, implyingslower job creation. Consumer confidence is likelyto worsen somewhat due to increased global andlocal uncertainty. This might (i) hinder employees’bargaining power and thus diminish wage growthand (ii) increase precautionary savings, as thoseemployed feel less safe about their jobs. At thesame time, relief will come from diminishingconsumer price growth (as no tax hikes are plannedand global commodity price pressures ease).SwedbankEconomic Research DepartmentSwedbank AB. SE-105 34 Stockholm. Swedbank’s monthly newsletter is published as a service to our customers. We believe that we have used reliable sources and methods in the preparation of the analyses reported inLegally responsible publisher this publication. However, we cannot guarantee the accuracy or completeness of the reportCecilia Hermansson, +46 8 5859 7720 and cannot be held responsible for any error or omission in the underlying material or its use. Readers are encouraged to base any (investment) decisions on other material as well. Neither Swedbank nor its employees may be held responsible for losses or damages,Martiņš Kazāks, +371 6744 5859 direct or indirect, owing to any errors or omissions in Swedbank’s monthly newsletter.Dainis Stikuts, +371 6744 5844Lija Strašuna, +371 6744 5875 4 (4)