With the pandemic loosening its grip in the third quarter, collection restrictions were eased and spending opportunities increased. Yet, regardless of the renewed vibrancy, economic growth has decelerated. Although the third-quarter GDP growth figure was revised upwards by the Bank of Latvia, the deceleration is evident. The quarterly rate stood at 0.6%, four times lower than in the second quarter. What antidote to the pandemic in the current scenario?
Despite the rebound, economic deceleration has some logical explanations. One comes from household spending abroad. With the lifting of the restrictions, travel has increased, increasing spending outside Latvia. Thus, although in the third quarter analysts saw a greater increase in private consumption, the positive effects materialized abroad, increasing imports and failing to contribute to the growth of the Latvian economy.
Another factor that previously contributed to faster growth and subsequent deceleration is the stock of finished products and raw materials. Changes in inventories gave a significant kick to GDP growth in the first half of the year. Concerned about production and supply disruptions and the potential price increase, many manufacturers and traders have stockpiled materials and finished products. The same has also been reported in Lithuania and Estonia. Warehouses were preferably kept full even in the third quarter, but with a considerable reduction in supplies. So the contribution of inventory changes was negative in the third quarter.
Other factors such as higher construction costs (especially building materials) and equipment prices have joined the uncertainty caused by the pandemic, slowing down new investment plans. In addition, a clearer awareness of the fragility of human capital caused by pandemic experiences and labor shortages has prompted an increased focus on potential process automation.
Due to the soaring price, the increase in the real volume of exports was much more moderate than that of the monetary value. At the same time, exports of services (mainly tourism and transport services) are still significantly below the pre-pandemic level. As in the case of exports, the value of imports was also significantly stimulated by rising prices this year, while real imports of goods and services grew more modestly.
In this regard, the Bank of Latvia reports that the growth of purchasing power is uneven and exceeded by wage growth. However, while customers may find it painful to pay more on certain goods or services, with real net wages up 6.3% in the third quarter, the purchasing power of the employed has improved, though not as well as the average wage (+10.4%). The differences in the effects of the pandemic and the increase in inflation on various population groups, however, are intensifying more and more. While the purchasing power of employed people is, on average, growing, people with constant incomes such as, for example, pensioners or those whose benefits are not reviewed and increased on a regular basis, may find themselves in less pleasant circumstances. Although the problem is currently addressed by various temporary public assistance mechanisms, such as support for the payment of energy bills, the most vulnerable population groups nevertheless face greater risks of a decline in purchasing power.
The differences are also significant among the employed. For example, the pandemic has posed great challenges to those who work in the hotel and restaurant industry. And here the problems are far from over. This is reflected both in the decline in the number of employed people and in the relatively slower wage growth in this sector. At the same time, other sectors with better opportunities for remote work (information and communication technologies) or less exposure to the contraction in demand (construction) have been able to increase the wages of their employees. Pay has also grown to a greater extent in the healthcare sector thanks to higher wages and additional wages related to extra work in the circumstances of the pandemic.
The big picture at the beginning of the year is likely to reveal a greater tightening of the labor market caused by stronger restrictions on sellers of certain goods and service providers. Why don’t we focus on boosting productivity and real economic growth by production and export instead?