Whatever government will be formed after Saturday’s election and whoever will occupy the ministry seats, one thing is clear: No plain sailing for the economy yet although it – seemingly – has stabilized.
Growth for the second quarter of 2011 as compared to the second quarter of 2010 is a quite respectable 5.6% but as can be seen from Figure 1 it is not exactly broad-based yet.
Figure 1: GDP, private consumption, government consumption, private investment (gross capital formation) and exports, 2007 Q1 = 100
Source: Central Statistical Bureau
Figure 1 tries to show the development of GDP and its demand components since the last year of economic growth, i.e. 2007. Only exports are today above 100, meaning that it is the only one of these economic variables that today accounts for more quantity than in 2007.
While investment and private consumption seem to have hit bottom and experience a protracted bounce-back, economic growth is mostly created by the remarkably resilient export sector, where, as previously explained, lack of competitiveness has either been overcome via the internal devaluation or was never as much of a problem as some claimed. Government spending still points downwards compared to its 2007 level; this, of course, reflects the austerity programme, the necessity of which I have argued for here, here and here – and in other posts.
Private consumption still runs 20% below its peak value of 2007 while capital formation is at only half of what it was back then. Disaster! Well, not completely – like government spending they are partly constrained by their excessively high values during the ‘fat years’.
Figure 2, which I haven’t seen used in the debate earlier, tries to explain this. It adds up all the spending by the Latvian private sector, i.e. for consumer goods and services and for investment goods and portrays this as a share of GDP.
Figure 2: Private consumption plus private investment (gross capital formation) as percent of GDP, quarterly data, both series seasonally adjusted
Source: Central Statistical Bureau
What is remarkable here is actually not that the share has declined – the remarkable part is that for a period during 2006-07 it constituted more than 100% of GDP! In terms of spending, you, me and the companies gobbled up more than all the income created in the country, a phenomenon that is very rare. Add to that the public sector’s spending of close to 20% and we get internal demand of some 125% of GDP – every time Latvia made four lats, it spent five lats, reflected in the massive borrowing and the exorbitant current account deficit of that time.
Public sector demand is constrained by the austerity measures and the performance of private sector demand is anaemic because of its past excessive and unsustainable levels. Altogether it speaks of an economic revival that is constrained by past excesses and depends dangerously much on the performance of exports.
Alas, time to improve the supply side of the economy e.g. by making it more attractive to invest here, reduce red tape, fight corruption and all those other measures that are so often talked about. Could be nice with less talk and more action this time.
Morten Hansen is Head of Economics Department, Stockholm School of Economics in Riga
Komentāri (23)
anita_meistere 20.09.2011. 08.48
does those graph contains some data about grey/black part of economy?
it quite worthless to show such figures, if we can not include about 30-40% of data!!!! -20% in private consumption?:D looking from people crowds in shopping malls, and incredible money amount in cash-in ATMs in LV…i would say it will be at least +10% in real life.
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Dzintars > anita_meistere 20.09.2011. 15.58
The unemployment numbers should also be decent. The most trustworthy is the survey-based one where people respond about their situation. of course they may not tell the truth but there is nothing to fear from doing so while I agree that the number of registered unemployed can be problematic (some register but are not really unemployed, some stop registering when they can no longer get benefits, although they are still unemployed).
Moreover, for me it is not so important whether unemployment is 15.5% or 16.2% – this is macrodata and can be (and is…) imprecise but what matters to me is whether unemployment is big or small and the data is good enough to say that it is big.
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anita_meistere > anita_meistere 20.09.2011. 15.49
thank you for answer. that is abolutly true, but do we have relevant data about unemployment???
i guess no…illegal unemployment and totaly unprecise data of Latvian total population (we don have such numers jet!) can make huge corrections to this figures. nobody knows, what are those 11%! how many of them are outside country, without letting our officials to know that.
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Dzintars > anita_meistere 20.09.2011. 13.37
The data is not worthless. Another way to establish that consumption is down is to look at unemployment. Consumption is the biggest part of the economy (some 60-65%); thus if consumption has dropped this should be seen in terms of lower employment/higher unemployment – and that is exactly what we have (unfortunately).
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Elita Dreimane 03.11.2011. 10.57
During the period of 1996-2004 (prior to EU) the average annual growth of GDP in Latvia was 8.19% (LT 7.79%, EE 7.93% ). During the subsequent period of 2004-2010 the average growth of GDP in Latvia and even Estonia (!) was negative while in Lithuania it was just about 1%.
One may argue that we have done many things wrong. However, Estonia has done almost everything right, still it’s ‘success’ is far from spectacular. So it seems that the neoliberal advice does not work, or what?
You have rightly mentioned in your former blogs that convergence is far from automatic, that we have to focus on supply side as the enabler of long term growth.
I guess there should be no question that to boost the supply side the investment in productive sector and human capital is much needed. Sure, we have to make it more attractive to invest here, but how exactly? I believe we need to discuss this matter much, much more, if we want that reasonable action ever follows.
The ONLY source of investment is savings; still we never even touch this subject. Do you suggest that FDI i.e. foreign savings are sufficient for the sustainable growth and convergence? I guess not only Baltic experience, but history of the world economy overwhelmingly tells – it’s NOT!
Or you think I’m wrong here?
Do you have guts to discuss the role of NATIONAL SAVINGS as well? And policies that prevent or stimulate them.
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Aivars Laicāns 21.09.2011. 09.52
Hopefully it will be a government without your creepy stalker, Armands “I’ll play you a tune on my harmonica” Strazds.
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@arturs_kucs > Aivars Laicāns 22.09.2011. 09.49
Bravo, Morton! I enjoy Armands’s contribitions because they shake up what would otherwise be a rather staid debate (imho).
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Dzintars > Aivars Laicāns 21.09.2011. 13.46
It is true that Mr Strazds and I disagree on more issues than we can perhaps count but I admire him for being part of the debate.
And the least we could do when debating is sticking to a reasonably decent tone, please.
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