Macro outlook for Latvia

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Helena Ferguson
7 years ago
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1 Macro outlook for Latvia ECB prints money, Russia sinks deeper: how does it impact us? Mārtiņš Kazāks Deputy Group Chief Economist Chief economist in Latvia Swedbank May 215

Global outlook 215-16: patchy, but getting better yet, do keep in mind the

2 Global outlook : patchy, but getting better yet, do keep in mind the hefty dose of painkillers and steroids Source: Author: Gatis Šļūka

3 Global growth: improving, but still patchy Europe is doing better, US is a mixed bag with a positive spin, China is slowing and seems to know what to do, other emerging markets is a tough place Annual GDP growth, % Germany UK Sweden USA France Finland Italy Russia China India Brazil Source: Reuters Ecowin -15 3

4 Global macro? Well, many global indicators are close to their historic averages or converging towards those levels not bad! 4

5 Global macro? Well, many global indicators are close to their historic averages or converging towards those levels not bad! 5

6 Global macro? Well, many global indicators are close to their historic averages or converging towards those levels not bad! 6

7 Global macro? Well, many global indicators are close to their historic averages or converging towards those levels not bad! 7

8 Global macro? Well, many global indicators are close to their historic averages or converging towards those levels not bad! 8

9 Global macro? Well, many global indicators are close to their historic averages or converging towards those levels not bad! 9

10 Global macro? Well, many global indicators are close to their historic averages or converging towards those levels not bad! 1

11 Quantitative easing (QE): perhaps, the only major abnormality seems to be very low nominal interest rates Source: Haldane, Bank of England 11

12 Latvia Estonia Lithuania Malta Ireland Germany Austria Belgium France Luxembourg Slovenia Finland Netherlands Slovakia Italy Portugal Cyprus Spain Greece ECB QE: aiming to correct for the negative output gaps but what if long term potential growth rates are lower now? It would mean excessive stimulus and more bursting bubbles later on Output gap as % of potential GDP in the euro area countries in Above potential Real 1-year goverment bond yields, % Below potential 4 2 Source: EC estimate Euro area USA Source: ECB Are you serious? 12

13 Euro area: cheap oil, cheap euro, and low (negative?!) interest rates to boost its short term recovery yet, its long term health still to depend on structural quality and strength Interbank rates, 3 month fixing, % EURIBOR (EUR) STIBOR (SEK) LIBOR (USD) Annual wage growth and unemployment in euro area, % Source: Reuters Ecowin Unemployment rate (rs) Source: Reuters Compensation per employee Ecowin 13

14 Do we finally see the forest behind the trees? global growth to inch up, but still heavily reliant on policy support with significant upside and downside risks, i.e. remain vigilant Annual GDP growth ( ), % 9 Risk scenarios (probability, %) 7 5 Better; Worse ; 2 Base; 6-1 US Euro area China Japan United Kingdom World -3 Source: Reuters Ecowin, Swedbank forecasts (April 215) Source: Swedbank forecasts (April 215) 14

Russia: cheap oil, cheap rouble, and financial stress it will only get worse with the current policies the contraction is unlikely to end well into 216 Annual growth of GDP

15 Russia: cheap oil, cheap rouble, and financial stress it will only get worse with the current policies the contraction is unlikely to end well into 216 Annual growth of GDP components, % Source: Author: Gatis Šļūka GDP (rs) Investments Households Exports Imports Source: Ecowin 15

16 Russia: the good, the bad, and the ugly broken growth engine is a massive institutional problem, but the Russian public seems not to mind it major risks are political, not economic Retail sales, wages and unemployment 25 1 GDP and oil price Unempl. rate, % (rs) Real wage, % YoY Retail, % YoY Source: Reuters Ecowin Nominal GDP, USD bn Brent, end of period, USD (rs) Source: Reuters Ecowin 16

17 Latvia: in search for exports... whatever you do, think of how to boost productivity! 17 Source: Author: Gatis Šļūka

18 Growth: has slowed and so has income convergence; GDP expansion of about 2% p.a. is way too slow for the Baltics GDP annual growth, % Euro area Estonia Latvia Lithuania Source: Eurostat 18

19 GDP is driven by: robust consumption, but exports are weak and investment activity has been too low multiple one-off excuses, but it is also a sign of structural qualities GDP, exports, household consumption, and investments, annual growth (%) 6 Estonia Latvia Lithuania GDP Exports Household consumption Investments (w/o inventories) Source: Reuters EcoWin 19

20 Enduring love, wrong partner: exports to Russia to fall big time, but there are good opportunities in other markets Annual growth of goods exports, 3M average (%) 1 8 Estonia Latvia Lithuania Total -6 To RU Total To RU Total LT origin, total -4 To RU -6 LT origin, to RU

21 Labour markets: it is not if wages will rise it is about can the companies afford wage increases? Gross average income per employed in 212, % from level in Latvia Note: the darker the colour, the higher the income Source: Eurostat, Swedbank calculations 21

22 Labour markets: employers between the rock and the hard place, i.e. the name of the game is productivity Labour market indicators, % 25 2 Estonia Latvia Lithuania Unemployment rate Real gross wage growth FTE productivity growth Source: Reuters 22

23 Baseline scenario : slow growth, low inflation, slow decrease in unemployment Macroeconomic indicators f 216f Real GDP, annual change in % Estonia Latvia Lithuania Unemployment rate, % of labour force Estonia Latvia Lithuania Inflation, % Estonia Latvia Lithuania Real net monthly wage growth, % Estonia Latvia Lithuania Sources: National statistics and Swedbank April 215 forecasts 23

24 Midlife crisis: what about the the long run? GDP per capita (adjusted for purchasing power), % of Germany Italy Greece Portugal Czech Republic Estonia Latvia Lithuania Hungary Poland Bulgaria Source: Eurostat 24

25 Underinvestment: can one invest so little and remain competitive? Not for long! 25

26 Digitalisation: boost to productivity, but also job destruction do they have the skills to get those jobs? I have taken too many years off my schooling Author: Gatis Šļūka, Source: 26

27 Welfare state: which way? How will tax policy change? What services to become private sector supplied? Gini coefficient 4 35 General government social spending, % of GDP EA EE LV LT SE Source: Eurostat EA (simple average) Estonia Latvia Lithuania Sweden Source: Eurostat 27

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