The Latvian Economy - No 7, September 14, 2011: Household incomes rise – to consume or to save?

1. The Latvian Economy
Monthly newsletter from Swedbank’s Economic Research Department
by Lija Strašuna No. 7 • 14 September 2011
Household 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 the
Purchasing 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 by
an impressive 3.3% in annual terms, or 30 40
thousand persons. Wage growth accelerated as 30
well – the average net wage was by 5% higher than
20
a year ago.
10
The ratio of full-time equivalents (FTEs) to occupied 0
posts1 (i.e., the work load) also rose. Overall, after
-10
taxes and inflation, the total wage bill (i.e., the
average wage multiplied by the number of -20
employed FTEs) grew in the second quarter of -30
2011 by nearly 3% in annual terms. The purchasing -40
power of households is thus increasing. 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11
Real net wage
The 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: CSBL
of 2011 due to higher activity rate. However, the
unemployment rate remains high – at 16.2%, Furthermore, out of 30 thousand newly employed
according to the Labour force survey. It should also during the last year, 3400 were involved in active
be 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 across
1
This is the measure of employment. As defined by the Central industries and across positions. Wages are raised
Statistical Bureau of Latvia (CSBL), an occupied post is a paid more through bonuses than as a regular part of
post to which an employee has been assigned. The source is remuneration, and there are more opportunities for
business statistics (which also provides FTE data).
Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46 8 5859 1000.
E-mail: ek.sekr@swedbank.com 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.

2. The Latvian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
No. 7 • 14 September 2011
raises in exporting and export-related sectors, Consumer confidence and net wage dynamics
where the financial situation of businesses is better. 80
60
Employment 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 private
Therefore, the average numbers do not necessarily consumption growth in the first half of this year. For
mean improvements for the majority of employed. instance, in the first seven months of 2011, the
For instance, a recent survey by Fontes (a seasonally adjusted retail trade turnover (without
consulting firm) showed that, out of every ten motor vehicles) in real terms was 2.5% higher than
employees, three saw wage increases during the a year ago. In July, it was up by nearly 7% over
last year, two saw wage decreases, and five saw no December 2010. The turnover of cars and
change in wages. motorcycles is also growing fast, although from very
low levels and partly due to the activity of
Job 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: CSBL
Overall, the positive labour market developments
have also brought improvements in consumer Of course, the labour market is not the only source
confidence. First, unemployment expectations have of improvements in private consumption. Banks are
fallen notably. Second, the participation (or activity) slowly becoming more active in issuing loans. Out
rate increased in the second quarter of 2011, not of LVL 65 million (EUR 92.5 million) in new
only because students and pensioners became household loans issued to residents in the first half
more active, but also because the share of those of the year, 35% were consumer loans (of the total
who have lost hope of finding a job fell. As a result, credit stock for resident households, consumer
the number of short-term unemployed (less than a credit accounts for only 20%).
month) increased somewhat, thus reducing the
share of long-term unemployed (more than one Indications are that emigrants are continuing to
year). send money back to their relatives. These data
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3. The Latvian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
No. 7 • 14 September 2011
cannot be distinguished effectively from other rising along with incomes, while term deposits are
transfers 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-average
government, i.e., except for EU funds) to Latvia interest rate for short-term deposits in the first half
increased by 19% in annual terms in the second of 2011 was about 0.4% for lats and 1.2% for euro
quarter of 2011. We believe that at least part of this (i.e., significantly below inflation). Households thus
increase is due to transfers of emigrants to their have a motivation to spend their money, buy
families. assets, or invest in alternative financial instruments,
rather than deposit it. In addition, if a person
It should also be taken into account that not all receives an “envelope wage”, it might be easier for
incomes appear in official statistics due to tax him/her to save “under the mattress”.
evasion (“envelope” wages and informal/illegal
employment). Tax revenues as a percent of GDP Household deposits, LVL m
are continuing to decline in 2011 (28.1% in the first 3500
quarter vs. 29.6% a year ago, on an accrual basis)
even despite tax hikes; this indicates a possible 3000
increase in tax evasion, which is likely to support
consumption as well. At the same time, “envelope 2500
wage” growth is very unlikely to be stronger than
2000
official wage increase.
1500
Savings rate seems to decline again
1000
The household savings rate increased notably in
2008-2009, to 5% and 9% of disposable income, 500
respectively. Data for 2010 are not yet available,
0
but the Bank of Latvia estimates suggest that it
2005 2006 2007 2008 2009 2010 2011
decreased to about 3%.2 It seems that in the first Overnight Short term Long term Source: Bank of Latvia
half of 2011 households were also more prone to
consume rather than save. With incomes and
optimism rising, so also did household
consumption, while deposits have been largely Weighted average interest rate for deposits, %
stable since the beginning of the year. In the first 14
half of 2011, household deposits grew by just 0.3%
12
in annual terms (2.5% in 2010).
10
Household 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 cases
Of course, the fact that deposits are not growing
does not necessarily mean that people are not
saving. 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/ (in
Report, July 2011. Latvian)
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4. The Latvian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
No. 7 • 14 September 2011
the sums do not exceed EUR 1000, which Taking into account the increased uncertainty
constitutes roughly two months’ average net wages. globally and also locally, it is very important that
households find the right balance between
The ratio of household loans to deposits, although consumption and savings. Unfortunately, although
having 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 negative
For comparison, the corresponding ratio is 1.6 for shock hits the economy.
Estonia and 1 for Lithuania. In addition, the
distribution of deposits is heavily skewed towards
the most affluent part of the society, while those
with small and medium incomes are building up
significantly smaller deposits.
Lija Strašuna
What next?
Export and investment growth is expected to slow
due to slower global growth. As a result, Latvia’s
economic growth will decelerate as well, implying
slower job creation. Consumer confidence is likely
to worsen somewhat due to increased global and
local uncertainty. This might (i) hinder employees’
bargaining power and thus diminish wage growth
and (ii) increase precautionary savings, as those
employed feel less safe about their jobs. At the
same time, relief will come from diminishing
consumer price growth (as no tax hikes are planned
and global commodity price pressures ease).
Swedbank
Economic Research Department
Swedbank 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 in
Legally responsible publisher this publication. However, we cannot guarantee the accuracy or completeness of the report
Cecilia 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 5844
Lija Strašuna, +371 6744 5875
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