In Latvia, the largest impact on the changes in the average consumer price level in May 2022, compared to May 2021, was the rise in prices for housing-related goods and services, food and non-alcoholic beverages, and transport-related goods and services. Inflation is rising and although Latvia had the lowest average annual inflation among the Baltic States in May, the inflation forecast for this year has been raised by about 5 percent. In the first quarter, Latvia’s GDP grew faster than the EU average, and it is forecasted that this year Latvia will see the fastest economic growth among the Baltic States. Unemployment also declined during the rise in prices – the registered unemployment rate in Latvia fell to 6.1% at the end of May, and employment growth in Latvia in the first quarter was faster than the EU and euro area average.
Introduction
The war in Ukraine has fundamentally changed the economic environment, and the development of hostilities is exacerbating the existing disruptions in global supply chains associated with the Covid-19 pandemic, global energy, material and component price pressures, and uncertainty. As a result, there is a rise in inflation around the world and a recession in national economies, which is forcing individuals to prepare for the crisis. In May 2022, both local and international organizations have published statistics on changes in the economy in early 2022, as well as updated the forecasts made in the early stages of Ukraine’s war, thus this June Economic News will present Latvia’s economic indicators and forecasts for the coming time.
Inflation Still on the Rise
Consumer prices in Latvia increased by 4% in May this year compared to April, but during the year – in May this year compared to May 2021 – as visible in Figure 1, consumer prices increased by 16.9%, according to the Central Statistical Bureau. At the same time, the 12-month average consumer price level increased by 7.8% in May compared to the previous 12 months.
Figure 1. Percentage change in Latvian consumer prices compared to the corresponding period of the previous year
Source – Central Statistical Bureau of Latvia, 2022
The most significant impact on price changes in May this year compared to April was the rise in prices for housing-related goods and services, which reached the sharpest increase in a month in 28 years. Food and non-alcoholic beverages, transport-related goods and services also had a significant impact on inflation. Also in the group of various goods and services, housing equipment, restaurant and hotel services, as well as goods and services related to leisure and culture. Over the month, food and non-alcoholic beverage prices increased by 1.9%. In turn, in May this year, Latvia had the lowest average annual inflation among the Baltic States. Annual inflation was 18.9% in Lithuania and 20% in Estonia in the same time period.
Furthermore, The Bank of Latvia has raised its annual average inflation forecast for 2022 from 9.5% (previously estimated in March) to 14.8%. It was pointed out that the unfavourable development of hostilities in Ukraine makes it difficult to access global resources and maintains higher resource prices for longer, which in turn raises the inflation outlook. By 2024, due to the expected fall in energy prices in future transactions, inflation is expected to decrease to 2.4%, anticipating an improvement in the geopolitical situation. However, these macroeconomic forecasts have been developed in conditions of high uncertainty caused by the unpredictable course of the war launched by Russia and the related change of global prices, therefore are subject to drastic changes.
Growth of the Gross Domestic Product (GDP)
In the first quarter of this year, Latvia’s gross domestic product (GDP) grew faster than the European Union (EU) average compared to the corresponding period last year, according to the data of the re-assessment of the EU statistical office “EUROSTAT”. According to seasonally adjusted data, Latvia’s GDP grew by 6.4% year on year in the first quarter. In the first quarter, economic growth was recorded in all EU Member States on an annual basis. On a quarterly basis, as is visible in Figure 2, economic growth was recorded in 23 EU Member States. The third fastest growth was seen in Latvia (+ 3,6%), just after Ireland and Romania.
Figure 2. Percentage change of gross domestic product in Europe in the 1st quarter of 2022
Source – EUROSTAT, 2022
The Organization for Economic Co-operation and Development (OECD) has also forecasted the fastest growth in Latvia out of the three Baltic States this year. The OECD forecasts that Latvia’s GDP will grow by 3.5% this year. In turn, next year the Latvian economy is estimated to grow by 1.6%. According to the organisation, the harmonized consumer price index in Latvia will increase by 13.3% this year but will increase by 8.6% next year. In turn, the unemployment rate in Latvia, according to OECD estimates, will increase from 7.2% this year to 7.4% next year. The OECD notes that Latvia’s export growth will slow due to the effects of Ukraine’s war, material shortages and weaker economic activity in the European Union, but strong demand for some of Latvia’s main exports, including timber and food, will slow. Meanwhile, inflation will remain high, reducing real wages and private consumption. Changes in external demand will contribute to a small increase in unemployment.
However, The Bank of Latvia has increased its forecast for Latvia’s GDP growth this year from 1.8% previously estimated in March to 2.9%. The first quarter GDP growth was faster than expected, which has allowed the growth forecast to be raised. At the same time, the Bank of Latvia has reduced Latvia’s economic growth forecast for 2023 from 3.2% in March to 2.4%. The forecast has been reduced because, in the Bank of Latvia’s view, rising prices and costs will weaken economic activity at the end of the year.
In its turn, Latvia’s GDP growth in 2024 is currently forecast at 4.2%, compared to 4.1% forecast in March. The Bank of Latvia expects the business sentiment to improve, therefore the pace of economic growth is expected to recover. However, it should be noted again that the projections are based on high uncertainty.
Employment Situation
At the end of 2021, the registered unemployment rate in Latvia was 6.7% of the economically active population, but at the end of April this year – 6.5% of the economically active population. At the end of May this year, the registered unemployment rate in Latvia was 6.1% of the economically active population, which is 0.4 percentage points less than at the end of April, according to information published by the State Employment Agency (SEA).
At the end of May, the lowest registered unemployment rate was still in the Riga region – 4.4% of the economically active population, which is 0.2 percentage points less than a month earlier, but the highest registered unemployment rate remained in the Latgale region – 13.5%, which is a decrease by 0.7 percentage points compared to the end of April.
Overall, the number of employed people in Latvia in the first quarter increased by 4.3% year-on-year, recording a faster increase than in the EU and the euro area on average, according to recent data released by EUROSTAT. This is observed due to multiple factors, however, mainly – the declining solvency of the population, the forthcoming crisis and the observed rise in the prices of goods and services.
Conclusions
Rising inflation has changed the direction of monetary policy in most parts of the world, with decisions being taken to reduce monetary policy support and raise interest rates, making borrowing costs for governments and the private sector more expensive. Across the euro area, inflation continues to rise and its pressures have widened and increased, with prices of many goods and services rising sharply. The rise in global energy and food prices and production costs has also led to an increase in Latvia’s inflation forecasts for this year and next. Food and energy account for a large share of Latvia’s household consumption basket, with prices rising particularly sharply, leading to inflation in Latvia rising faster than in countries with a lower share of food and energy in consumption. At the beginning of the year, however, government support, which allowed households to cover their expenditures in the short term and reduce the impact of energy prices on inflation, has largely ended. Wage growth, which is still being hampered by labour shortages, is increasing the cost of production, which companies are trying to pass on to output prices, in addition to rising material costs. Although it is reported that Latvia is forecast to have higher economic growth and lower inflation than neighbouring countries, an unprecedented rise in prices for all goods and services will be experienced, so a new state support package would be vital during the rise in prices. Inflation will remain high as long as hostilities in Ukraine remain and resource prices are maintained. The forecasts are also prone to change due to the uncertain geopolitical situation. At present, rising commodity prices are also deteriorating in cases where price increases are not justified, so retailers and producers need to be monitored more closely to avoid further unjustified increases in inflation.
References
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Original Briefing on the China-CEE Institute website – https://china-cee.eu/2022/06/23/latvia-economy-briefing-latvias-economic-indicators-during-the-rise-in-prices/
Šo rakstu sagatavoja Latvijas Zinātņu akadēmijas Ekonomikas institūts, tas ir tapis sadarbībā ar China-CEE Institute un ir China-CEE Institute intelektuālais īpašums.
This briefing was written by the Institute of Economics of the Latvian Academy of Sciences, in collaboration with the China-CEE Institute, and is the intellectual property of the China CEE-Institute.