Economically, forecasts for 2022 focus on energy prices, household purchasing power and various restrictions that may lead to a critical situation at the beginning of the year. However, as the year progresses, the positive effects of the inflow of funds, the growth of industry and exports, and the growing importance of the construction industry will be felt.
In the three quarters of 2021, the Latvian economy grew by 5.2 per cent. Activity slowed in the last quarter of the year, and the slower pace will continue until spring when the risk of contagion recedes, and imposed restrictions might be lifted. Consumption will decline during this period due to weaker household sentiment, the impact of high energy costs on purchasing power, and imposed restrictions. Consumption will pick up rapidly in the second quarter and accelerate growth.
Manufacturing and export growth will be strong supports. But the pace of expansion in these sectors is likely to slow gradually. There are many challenges: growth will be affected by supply problems, pandemic-related disruptions and rising energy prices.
At the beginning of the year, the situation could become critical due to these aspects, but this would only be temporary. Despite the difficulties, a recession is not expected. The emergence of Omicron requires stricter restrictions affecting international passenger traffic, which means that the tourism industry will continue to suffer.
The focus will be on construction
Growth in manufacturing and exports will be strong support. But the pace of expansion in these sectors is likely to slow gradually. There are many challenges: growth will be affected by supply problems, pandemic-related disruptions and rising energy prices.
At the beginning of the year, the situation could become critical due to these aspects, but this would only be temporary. Despite the difficulties, a recession is not expected. The emergence of Omicron requires tighter restrictions on international passenger traffic, which means that the tourism industry will continue to suffer.
The GDP forecast for 2022 is 5 per cent. However, the risks are on the downside, which means that the increase in activity in 2022 could be somewhat lower. This will be assessed in the second quarter.
What might hamper growth
The Latvian economy will face the risks and challenges of high inflation, which will affect the positive aspects of growth. The presence of the virus will continue to affect the cyclicality of the economy and maintain increased demand for goods. Areas already affected by the virus will be even slower to recover. The main challenge will be to develop the adaptive capacity of the general public (labour market, skills, social environment, etc.) and future vaccination policies, which will be the main obstacle in the short term.
Due to the variants of the virus and the duration of immunity, vaccinations may need to be given regularly, which means that the smooth running of these processes will have a huge impact on the economy. Step by step, the effects of the virus will decrease, but they will not disappear completely.
Wages will reach new heights
In the third quarter of 2021, the average monthly wage increased by 10.4% to EUR 1,280, equivalent to EUR 940 after tax. Monthly wages in the financial sector, ICT, professional and business services, health and social care, energy, public administration, mining, and construction were higher than national average wages. The lowest average wages were paid in the accommodation and food services (EUR 855) and education (EUR 988) sectors.
Such high inflation will lead to more frequent twice-yearly reviews of wages, especially in low-paying occupations. This practice could intensify if a high inflation environment emerges.
Wage growth is driven by relatively favourable economic conditions and labour shortages, especially in sectors where wage levels are already above the national average. These trends will intensify in the coming years. The increase will also be felt in the service sectors, which were affected by the crisis due to labour shortages, as operating conditions will also stabilise.
The pandemic has affected the wage structure - as the number of high-wage earners increases and the number of low-wage earners decreases, inequality increases.
In 2022, the gap could widen further. Inflation will follow closely follow rapid wage growth. However, it will not be able to cause a decline in average purchasing power, although the number of workers whose wage growth cannot offset rising prices will increase, especially without sparing low-wage workers. In the coming years, wage growth will fluctuate around 8 per cent.
Inflation will bite as never before
In November, the increase in inflation in Latvia reached an unprecedented level: 7.5%. Three categories had a significant impact on the changes in the average consumer price level - housing-related goods and services, transport and food, which accounted for 6.19 percentage points of the total growth.
Increases were also observed in other groups, but they were relatively insignificant against the backdrop of these three categories, although in these circumstances any additional increase amplifies the negative impact on purchasing power. Price increases in these categories will be a major concern for most households in 2022, making them a hot political issue.
The entire eurozone is affected by record-high inflation, the likes of which have never been seen since the introduction of the euro. Energy prices will be at the centre of this. It is difficult to predict the extent to which energy prices will be passed on to consumers.
Weather and geopolitics will play an important role in energy prices, which will have a particular impact on gas prices. High natural gas prices also directly impact oil prices, as oil is used as an alternative when needed. As the link between oil and natural gas is unusually strong this year, the cold weather could be a major reason for the sharp rise in oil prices.
Relief from high energy prices will likely come in late March or early April. Going forward, gas prices may remain high and gradually normalise over the next three years, although sharp swings in one direction or the other cannot be ruled out in the short term.
Despite the fact that the term “temporary” is being used less and less in the context of inflation, the general view remains that the inflation rate will start to decline over the next year. The inflation forecast for 2022 is 6 per cent.
Labour market prospects
Jobs will not cause difficulties - other things have come to the fore. Despite the outbreak of the virus, the work environment is stabilising and adapting to the new reality, which will be more permanent than it seemed at the beginning of the pandemic
The labour market will recover strongly in the second quarter of 2022. By the end of the year, unemployment may not be far from pre-crisis levels.
A survey of finance directors conducted by SEB shows that risks related to Covid restrictions are still considered the most urgent. 54% of the respondents mentioned this as a challenge. The shortage of skilled workers was identified as problem No. 2, which means that difficulties in hiring employees will be the most urgent problem in 2022.
It must be acknowledged that the stability of the labour market has been largely maintained by government support, which is a good foundation for overcoming the crisis. The potential for improvement in the labour market is great, but it is difficult to assess the prospects of entrepreneurs, who are taking a cautious stance even in industries experiencing tumultuous growth.
There is a widespread perception that the current surge in demand is only temporary. As a result, there is no rush to invest and hire in many segments, especially among SMEs. Economic growth in 2022 will open up new opportunities for employees in the labour market and the number of vacancies will rise.