Is retail trade growth held back by inability to expand fuel consumption?

According to Central Statistical Bureau (CSB) data, the annual growth in retail trade turnover at constant prices moderated standing at 1.8% in the first quarter of 2016, including an increase of a mere 0.3% in March. Although this was one of the major sectors contributing to economic growth in 2015, its annual rate of increase declined already during 2015, with a further decrease also in the first quarter of 2016.

The highest negative contribution to the sector's growth resulted from a fall in fuel retail trade in real terms. With fuel prices continuing on a downward trend in January–February (oil prices had a decreasing effect, while excise tax posted an increasing impact on them) and only slightly rising in March, the inability or unwillingness to consume more fuel could be seen more clearly. At this stage the upward trend in prices has become more explicit and is unlikely to encourage fuel consumption in the near future either. It should also be noted that the number of newly registered cars is shrinking, and the more fuel-efficient new cars is another factor hampering the fuel sales growth.

The annual growth of retail sale of household equipment subsided already at the end of 2015, remaining weak also at the beginning of this year. Probably this is associated with the sluggish lending which does not facilitate purchase of real estate, its renovation/repairs, finishing, furnishing, or improvement of its facilities.

At the same time, quite a rapid increase in the sale of clothing and footwear, as well as pharmaceutical products was observed early this year. It can partly be on account of the snowy and cold weather conditions, compared to last winter, that stimulated purchases of clothing during the usual seasonal sales, as well as an earlier beginning of the flu season. The bonuses paid at the end of 2015 (according to the CSB, they were considerably higher than in 2014) could be one of the reasons why in January–February the retail trade of information and communication equipment posted a rapid rise, subsiding already in March.

Trade in food products and online shopping have retained their positive contribution to retail trade growth. On the one hand, the saturation effect could leave an impact on the trade in food products; however, it allows for diversifying purchases of higher quality goods to a much larger extent than in the fuel market. As regards the stable growth in online shopping, it shows customer willingness to use the benefits of the modern trends in shopping.

However, the contribution of retail trade to the economic growth is likely to be more moderate this year due to several factors. The rise in wages and salaries is expected to be slower on account of less facilitating changes in legislation. A slight increase in savings can also be observed, indicating either caution on the part of consumers or saving for larger purchases, e.g. dwellings: sluggish lending persists in the above segment. A resumed price rise for fuel in line with global commodity price trends is likely to gradually become another factor hindering trade growth in the respective sector. However, this price/consumption relationship is more likely to be present in those consumption categories where daily consumption can be reduced or restricted. In other groups of goods it could be just the other way round: increasing price rise expectations (should they really increase) could actually even stimulate consumption. That would encourage buying rather than postponing purchases to some other time when the prices would have risen even more. Nevertheless, according to European Commission data, inflation expectations are not increasing in Latvia at this stage.