Trade still growing well but pointing to a slowdown in rise of purchasing power

After a rise in March, the retail turnover in April dropped by 2.0% (seasonally adjusted data at constant prices). The drop was primarily the result of the shrinking in the trade of foodstuffs (by 3.9%). The demand for non-food items dropped more moderately (by 0.8%).

Compared to April of last year, trade has increased by 6.2% with the year-on-year rise thus smaller than in March. It approached the level of growth to which the development of the income of the population also points.

Last year, the official salaries and employment lagged considerably behind the rapid rise in sales volumes. That invites the question why such a gap should develop. One of the reasons is that profit indicators of enterprises have improved significantly as has the income of the self-employed, and they promote a rise in trade volumes. Yet this explanation hardly suffices as the changes in the trade structure is also food for thought.

Let us take a look at one of the segments of traded goods currently growing most rapidly, i.e. automobile fuel. As of mid-2012, fuel sales have been contributing on average about 2.0-2.5 percentage points to the annual rise in retail trade. Thus their impact on the total growth in trade is very significant. The rise in fuel sales is fostered not only the objective increase in the number of automobiles but also the shrinking grey economy –  both the general population and businesses opt for shopping at the official points of sale more frequently. There are several reasons why the grey economy is contracting in this segment:

  • the overall economic growth that has improved the net worth of the population, reducing the with to “save” by buying illegally and to choose alternative means of transportation;
  • the activities of the State Revenue Service (VID) and other institutions; moreover, as of the beginning of 2012, stricter regulations are applied to imports of excise goods, including fuel, to Latvia;
  • the limits on fuel exports imposed by Belarus. This started as early as the end of 2011 but the impact became more pronounced as of mid-2012.  

Statisticians are trying to assess the changes in the grey economy and include them in the evaluation of the total economic development. It is a complicated task, and the real situation will never be reflected completely accurately. For this reason, some of the growth can certainly be explained not only by rising incomes but also by an expanding legal economy. It is an exact counterpart to the exacerbation of the drops in GDP and trade volumes during the crisis, according to the official data, by a rise in illegal activities. 

Thus right now, when the exports are slowing down rapidly, it is domestic consumption that acts to maintain growth, albeit less than the official data indicate.

The rate at which the grey economy is shrinking will drop gradually, yet it is not the main reason why we consider the slowing down in the growth rate. The main reason behind it is still the weak external demand. Even though trade can be sustained for some time by domestic demand, developments in the external markets are of paramount importance as is the ability of our entrepreneurs and our country as a business environment to increase competitiveness.

In the context of competitiveness, it seems appropriate to mention a piece of news that is more important than the current trade data: today, at the Council of Ministers of the Organization of Economic Cooperation and Development (OECD) it was resolved to invite Latvia to begin negotiations on joining the organization.  Joining the club of the 34 most developed countries is an important confirmation of the results achieved by Latvia and allows us to look to the future with more optimism. Of course, we do not expect to reap the benefits of OECD membership on the next day after joining, yet in the long run this event will have a significance felt – both directly and indirectly – by each and every consumer and merchant.

APA: Rutkovska, A. (2022, 27. may.). Trade still growing well but pointing to a slowdown in rise of purchasing power. Taken from https://www.macroeconomics.lv/node/2119
MLA: Rutkovska, Agnese. "Trade still growing well but pointing to a slowdown in rise of purchasing power" www.macroeconomics.lv. Tīmeklis. 27.05.2022. <https://www.macroeconomics.lv/node/2119>.

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