Like other EU member state's independent fiscal institutions, the Council quarterly prepares the Latvian economy heatmap. Observations from 2000 1st quarter till 2021 4th quarter available in MS Excel format here.
The year 2021 as a whole was marked by a convincing economic recovery from the Covid-19 crisis. Despite cautious forecasts at the beginning of the year, economic activity gradually improved with each passing quarter, and overall, the year ended with results that even exceeded pre-crisis levels. The gross domestic product grew by 4.8% in 2021, and by 3.5% in the fourth quarter. These trends are also reflected in the heat map, which shows that the economy over the last two years of Covid-19 has suffered only in certain segments and has been able to recover steadily from the downturn.
The average wage increased by 12.5% in the fourth quarter. Wages grew quarterly in 2021, averaging 11.8% over the four quarters. Wage growth in the private and public sectors differs by at least 0.1 percentage points, or about 20 euros.
Unemployment is falling faster than employment, especially in the fourth quarter, which means that the labor force is insufficiently integrated into the economy. In the short run, a number of factors may have contributed to avoiding the labor market by the population: the availability of state support measures, the prolonged uncertainty, and the choice to continue operating in the gray sector. A small proportion of the population avoided labor market because of vaccination against Covid-19 mandate.
As the number of vacancies continued to rise in 2021, but unemployment is falling and is relatively low, this puts a burden on existing workers and puts upward pressure on wages. The number of vacancies in 2021 increased by 25.3% compared to 2020, but in the 4th quarter the number of vacancies increased by 56% y-o-y. During the year, the number of vacancies in the private sector increased by 4.2 thousand or 35.8%, but in the public sector by 0.7 thousand or 9.5%.
Capacity utilization has reached pre-crisis levels. In the fourth quarter, it was 76.6%, and on average 75% per year, which is only 1.3 percentage points less than in 2019.
Demand in construction, manufacturing and services has gradually declined throughout the year, reaching around 8 percentage decline through 2021. The decline was most significant in the third quarter, but stabilized in the fourth quarter, so there is reason to compare the situation in the first and second half of the year. The decline in demand was most significant in the construction sector. In the first half of the year, construction demand was at 35.6%, but in the second half it fell to 28.3%. In the manufacturing sector, demand was 34.4% in the first half, then fell to 27.5% in the second half of the year. On the other hand, the 31.6% level of demand for services in the first half of the year changed to 27.7% in the second half, which is the smallest decrease.
The economic sentiment indicator was 99.6% in the fourth quarter, declining slightly compared with the third quarter, but overall, in 2021 economic sentiment approached pre-crisis levels. In 2021, it was 99% on average, compared to 91% in previous year.
Lending activity resumed in the second half of 2021, the volume of loans issued in the fourth quarter increased by 3.9% compared to the last quarter of the previous year, while the average volume of loans issued throughout the year increased by 0.7%.
The trade balance was negative (-4.3%) of GDP in the fourth quarter but recovered by around 8.3 percentage points comparing to second and third quarters. In 2021, the trade deficit was on average (-8.8%) and deteriorated by 2.5 percentage points compared to 2020.
In the current account balance, a surplus of 2.4% of GDP was recorded in the fourth quarter, an improvement of 3.3 percentage points quarter on quarter. In 2021, there was an average trade deficit (-2.9%).
The core inflation rate has risen to 2.3% in the fourth quarter, with energy and food prices is excluded from the core inflation rate. The consumer price index was well above core inflation and in the fourth quarter reached 7.1%. This indicates signs of overheating, which was particularly affected by rising energy and food prices during this period.
The house price index rose to 16.5% in the fourth quarter, with a significant quarter-on-quarter increase. Such consumer behavior was largely driven by high inflation expectations and rising lending activity, as well as the savings accumulated by the population during the pandemic.
In the fourth quarter, the composite heat map index of the economy was 0.4, the same indicator in was 2021. This is 0.1 percentage points less than before the crisis in 2019 and in 2018 on average.
The heatmap
Source: Central Statistical Bureau, Bank of Latvia, Eurostat, FDC calculations