Retail trade continues to reflect the rise in purchasing power

The gradual rise in purchasing power, with income levels rising and very low inflation persisting, in the first nine months of this year has fostered a rather fast growth of the retail trade sector. According to the data of the Central Statistical Bureau, the retail trade turnover in real terms increased by 5.6% year-on-year, including the 4.7% growth in the third quarter. These indicators substantially exceed the average growth rate of 2014 (3.6%).

Even though in September the annual growth of retail trade slowed slightly (4.3%), it was mostly because of the trade of automobile fuel. In other words, not always a drop in prices can be transformed in a rise in the consumption of the relevant goods and thus other branches can benefit from the finances saved. For instance, food and heating energy have become cheaper but their consumption cannot be unlimited. Up to August, the sellers of fuel and household furnishings benefited, in real terms, from the expenditure of means thus saved. In September, however, a saturation point may have been reached in the consumption of fuel:  as a result of shrinking prices, it began to increase more significantly in September of 2014. Likewise, some of the finances saved in purchasing food and power, residents may have channelled to the consumption not of goods but of services, which is evidenced by the stable increase in the prices of a number of services.

With the percentage of residents of Russia among those foreign visitors who come to Latvia primarily for recreation purposes shrinking since mid-2014 (as opposed, for instance, to those whose visits were related to Latvian Presidency of the European Union Council), the idea about the characteristics of consumption and purchasing power of the "average tourist" is gradually changing. Thus it could be said that retail trade, particularly in the third quarter, was mostly based on domestic demand.

The overall retail trade confidence index has been hovering in a relatively narrow range, but several of its components point to retailer pessimism: compared to the summer months, fewer merchants are expecting a rise in prices; the evaluation of the rise in retail turnover has deteriorated slightly after the growth observed in August, yet the proportion of merchants who believe that the amount of stocks is growing has increased. Moreover, representatives of the largest retail trade networks indicate in the media that the sector is experiencing shortages of labour force. However, while retail prices do not rise substantially, the sector cannot afford to pay the employees more, therefore self-serve cash registers are gradually being tested in supermarkets.

At the beginning of 2016 (in January and April), excise tax on fuel and alcoholic beverages is expected to be raised, and that is likely to be directly reflected in prices. However, since the rise in excise tax is not very significant and the consumption of these goods is less flexible than that of many other goods, no deterioration of retail trade confidence should be expected as a result of this factor. Moreover, the economic growth in 2016 is expected to be slightly faster, which could have a positive effect also on private consumption and the related development of retail trade.

APA: Paula, D. (2022, 28. may.). Retail trade continues to reflect the rise in purchasing power . Taken from https://www.macroeconomics.lv/node/1934
MLA: Paula, Daina. "Retail trade continues to reflect the rise in purchasing power " www.macroeconomics.lv. Tīmeklis. 28.05.2022. <https://www.macroeconomics.lv/node/1934>.

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