11.01.2021.

The day after tomorrow: what lies ahead of us after the apocalyptic events in 2020?

The day after tomorrow: what lies ahead of us after the apocalyptic events in 2020?
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One does not need to be Sherlock Holmes or Dr. Watson to say that economy is doing badly, and things are about to get worse. Indeed, it is negative forecasts like these that will most likely make the headlines.

Therefore, if you wish to become a famous forecast guru, the recipe is simple. Take the official forecasts by Latvijas Banka and downgrade them by ten percentage points. Alas, people tend to pay more attention to negative news, and not only in Latvia. Next year, hardly anyone will remember the forecasts of the doomsday prophets. If, by chance, somebody would ask after the promised end of the world, one could always reply that this is just a short-term improvement, but we will definitely live to see it next year.

Since I am not a doomsday prophet, this article is unlikely to reach the million click threshold. We have a different criterion though: our forecasts have to be more accurate than those of other experts of Latvian economy. Now, let us look at what exactly is Latvijas Banka forecasting and what economic forecasts Latvijas Banka submitted to the European Central Bank (ECB) at the end of 2020 for drafting the macroeconomic projections for the euro area?

In 2020, Latvia’s economy or gross domestic product (GDP) contracted by approximately 5%, less than projected at the outset of the COVID-19 pandemic. For example, a 6.5% fall was projected in March, while in June, in addition to the baseline scenario with a 7.5% decline, a severe scenario with a GDP decrease of 13.5% was announced. In other words, the actual economic downslide in 2020 turned out to be three times smaller than that seen in the previous major crisis of 2009. The situation differs considerably by sector of the economy: while tourism and entertainment services are living through tough times, agriculture enjoyed a record high harvest and the volumes of Latvian exports of goods reached new highs. According to the current forecasts, the economy will start recovering in 2021 and reach the pre-crisis level in 2022.

The current unemployment rate (approximately 8%) is 2–3 percentage points higher than before the pandemic. Such a rise would be six times smaller than the one seen in the crisis of 2009 and also considerably slower than Latvijas Banka projected in spring. Furlough benefits and wage subsidies, as well as state support programmes (tax holidays, loan guarantees) enabled businesses to retain their employees even during a significant turnover decline. Fast and decisive money injections in the economy is a precondition for maintaining a one-digit unemployment rate also in the future and for the unemployment to resume its downward path in the second half of 2021.

This is the first global crisis for Latvia as a euro area country, and we have witnessed that it is much easier to weather a crisis under the shelter of the euro. This time, there are no rumours of the lats devaluation and no one is rushing to currency exchange offices. The government is not requesting us to tighten our belts; on the contrary, thanks to the ECB's monetary policy, our government can borrow funds at record low rates for stimulating the economy. Those having taken a loan would know that due to high interest rates your interest payments to the bank could sum up to almost the same amount that you have borrowed from it. Currently, the rates at which Latvian government can borrow money are close to 0%. Thus, returning to sustainable fiscal policy after the crisis, we will not leave unbearable debt burden to the next generations.

The most important challenge at this stage is to invest wisely. It is not merely about absorbing the funds: the government support should both enable households and businesses to weather the crisis with fewer losses and to ensure that Latvian economy emerges from the pandemic stronger and more modern.

During the pandemic, consumer prices were stable overall, even posting a decrease for several products like car fuel, natural gas and heating. This is a cardinal difference from the 2009 crisis when the utility payments surged on account of the upswing in oil prices. Despite the concern over a potential deficit of buckwheat and toilet paper, shop shelves did not stand empty.

In the press release of its forecasts Latvijas Banka points to "the heightened uncertainty surrounding" them. It is true, but nevertheless, the morbidity and mortality rates in Latvia in 2020 were considerably lower than elsewhere in Europe; movement restrictions were milder, being a considerably smaller hindrance to the economic activity. Let me repeat myself once again that the time (and place) we are living in are among the most peaceful in the history of mankind. Discussions like whether to extend winter holidays for students may seem extremely important to us, but issues faced elsewhere are considerably graver, e.g., to compare with the war-stricken Nagorno Karabakh, citizen clashes in the US or just over the border in Belarus.

Rapid changes in the external environment may create an illusion that we and our actions cannot influence anything.

Even the current moment is actually a time of opportunity: it is our action or failure to act that will determine how fast and successful is our exit from the crisis.

And this is true not only with respect to health workers. High quality education is and will always be the best insurance against unemployment: online studies made it easier to access courses and study materials at the world's top universities. The success or failure of any business lies in its employees; therefore, the crisis is the right time to strengthen the corporate teams. At last, financing was found to increase the health care budget, and the need for a healthy lifestyle became really topical: we all – each individually and Latvia’s society at large – will benefit from this in the long term.

To sum up, the world will not end in 2021, and now, as always, is the time of great opportunity. Should you wish to comment, please write about your expectations in 2021. Let us meet after a year to see what has come true and what has failed.

APA: Krasnopjorovs, O. (2021, 18. oct.). The day after tomorrow: what lies ahead of us after the apocalyptic events in 2020? . Taken from https://www.macroeconomics.lv/node/5084
MLA: Krasnopjorovs, Oļegs. "The day after tomorrow: what lies ahead of us after the apocalyptic events in 2020? " www.macroeconomics.lv. Tīmeklis. 18.10.2021. <https://www.macroeconomics.lv/node/5084>.
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