A turning point reached in retail trade

The retail turnover in January, the seasonal factors notwithstanding, grew substantially (by 4.0%) over December, which may indicate that the long awaited turning point has been reached also in this branch of the Latvian economy.

Certain operational indicators pointed to impending improvements in retail already before. First, in January-February relatively good income from the VAT tax was observed in the state budget. Second, in contrast to the slow pace of improvement at the end of 2009, there was a very rapid improvement in consumer mood. In February the indicator continued to rise thus constituting evidence that this rapid improvement in consumer mood index had not been accidental.

Consumer moods and expectations play a great role in the macroeconomic processes, for the population makes everyday decisions about expenditures: spend now, borrow, or save for the future. At the time when the economy grew rapidly, Latvian denizens augmented their expenditure against the background of overall optimism, spending not only the money they had earned but borrowing even more. As the economic cycle swung into recession, the situation changed to its opposite: out of caution, expenditures were limited at an even more rapid rate than incomes contracted. All these processes are reflected also in trade activity, first augmenting the already rapid economic growth and later limiting the already weak domestic demand determined by the reduced incomes.

Since its highest point in June 2007, the retail turnover has contracted by a total of 38%. In automobile sales, which are registered apart from the retail turnover, the drop against the highest point, in December 2006, has been even steeper, i.e. 66%.