What's in store for Latvia's economy in 2020?
"Summer is over", "Lukewarm economic growth", "External environment remains overcast": these were the phrases recently used by Latvijas Banka economists to cautiously mark a downward shift in Latvia's economic development trajectory. This, however, should not be viewed as a crisis. Latvia's economy has been on an upward trend already for 10 consecutive years and it is the longest economic growth period since the restoration of independence which will continue also in 2020. Nevertheless, the economy is decelerating: an annual growth of 2%–3%, although slightly above the European Union (EU) average, is insufficient to catch up with the living standards of the most advanced European economies in the foreseeable future.
This downward shift in economic growth forecasts is a reflection of the slowdown in the global economy rather than a purely Latvian phenomenon. The economic growth forecasts of our major trade partners were revised downwards on several occasions in the course of 2019, which means a reduced export potential for Latvia as a small and open economy. The whole world watching the Brexit saga, a Donald Trump's tweet being the most reliable source regarding a truce reached in the US-China trade war or several analysts believing in a potential oil price surge in the first hours following the drone attack on Saudi Arabia – all those external uncertainties have made investors more cautious; their decisions to invest in production development are postponed and the development is really slow. What we see are, in fact, self-fulfilling expectations.
Given moderate economic growth, the signs of a labour shortage are not going to gather strength. The share of businesses pointing to labour shortage as an important constraint for business had decreased already towards the end of 2019. This means that the calls to simplify inflow of low-skilled labour could gradually disappear from the agenda. Instead of that, a larger focus on the existing labour reserves would be more appropriate: international comparisons show that in some regions and population groups (middle-aged men, young people, Latgale, ethnic minorities; more details available in discussion paper "Anatomy of labour reserves in the Baltic countries: a snapshot 15 years after the EU accession") employment remains inexcusably low.
Wages will continue to grow, albeit at a slower rate. In 2020, wages are expected to grow in all major sectors of the economy – by 6% on average. Consequently, the average monthly wage before taxes could reach EUR 1200 at the end of 2020. With the growth of wages significantly outpacing that of prices, the purchasing power of the average wage can be expected to increase. At the current juncture, markets anticipate a gradual decline in the oil prices and do not expect any sharp rises in food prices. Therefore, consumer price inflation will decelerate slightly in 2020 – to 2.4%.
Being a small and open economy, Latvia is significantly dependent on external environment. Reliance on favourable external developments, however, is no strategy for sustainable growth. For example, in 2019 we saw quite clearly that the prices of wood can go down as quickly as they were previously rising, thereby contributing to deceleration of the economic growth. Supporting economic development through implementation of structural reforms, inter alia improving the quality of education and health care, is a much safer strategy.
How healthy and well-educated we will be as individuals and as a society at large is something that depends on ourselves, and luckily no Donald Trump's tweets or oil price swings can affect that.