Better than expected labour market indicators
The second quarter saw a less pronounced drop in the economic activity than expected at the onset of the crisis, being also reflected in a more moderate rise in unemployment. The support measures extended by the government also contributed to preventing unemployment growth.
According to the Central Statistical Bureau of Latvia, the unemployment rate reached 8.6% in the second quarter this year, i.e. 1.2 percentage points higher quarter-on-quarter. Although the situation is worse than a year ago, it is better than it could have been under the current circumstances. Along with the rise in unemployment, the employment rate also posted a fall; nevertheless, the drop was more moderate, the number of economically inactive persons decreased as well. Monthly data suggested that, vis-à-vis February, the number of jobs wiped out is approximately equal to the number of inhabitants of Dobele municipality, i.e. almost 20 thousand; the tertiary sector has been particularly hard hit.
Until the end of June, the availability of furlough benefits limited the rise in the unemployment rate, but after that the benefits stopped. The current data do not yet suggest an increase in unemployment. However, we should keep in mind that employers were prohibited to lay off their employees for a month after applying for furlough benefits. It should also be noted that unemployment rates are traditionally lower in summer. Although the furlough benefits have been substituted by a wage subsidy mechanism as well as support to exporting and tourism sector businesses, the unemployment rate is still expected to rise somewhat.
At the beginning of the third quarter, the situation was better than expected in March when the economic activity was slowed down by the outbreak of the pandemic and bringing sectors such as accommodation and catering services, air transport, as well as art,recreation and entertainment services sectors to a near standstill. At this stage, no further accelerated unemployment growth is expected: this is supported by both improving employment expectations and the registered unemployment data (compiled by the State Employment Agency) showing that unemployment has stopped rising in the last few months. At the same time, the latest sectoral data, e.g. in retail trade and manufacturing, and the economic sentiment suggest that the economic activity is recovering.
Nevertheless, the future remains quite unpredictable as the COVID spread is still high abroad. Over the last few weeks, the COVID spread indicators have deteriorated in several trade partners of Latvia: this, with restrictions tightening, will affect the exporting businesses and tourism.If the situation in Latvia remains stable, an increase in labour demand is likely to be expected in the sectors more oriented towards domestic consumers and less dependent on the external environment, e.g. services and trade. Over the long-term horizon, it is also essential to make use of the opportunities provided by the crisis, for example, the financing of the EC Economic Recovery Fund that would enable investment in human capital by improving productivity and promoting competitiveness in the future.