Quarterly the Council, similarly to other EU member states' independent fiscal institutions, prepares the Latvian economy cycle heatmap. Observations from 2000 1st quarter till 2021 2nd quarter available in MS Excel format here.
The Latvian economy returned on a recovery path in the second quarter. The labour market saw a declining unemployment rate, reaching 7.9% in the second quarter and employment level reaching 62.3%. Wages continued to rise due to labour supply challenges, with wages rising by 10.2% year on year. During this period, the number of vacancies increased by 20%, with a total of more than 25,000 vacancies available in the second quarter. The economic sentiment indicator has significantly improved compared to the first quarter of this year and reached 103.8%, thus exceeding the indicators of 2019. Capacity utilization also reached a level of 75%, similar to the pre-crisis economic situation. However, the lack of demand remains as a limiting factor, in manufacturing, services and construction, at around 30-33% since 2020. Although lending remained low in recent years, the second quarter saw a slight increase in lending (0.9%) compared with the second quarter of the previous year. Lending for house purchase has become more active, which also correlates with a sharp rise in the house price index to 12.4%, a similar house price index was previously observed in the third quarter of 2019.
Latvia's foreign trade balance deteriorated in the second quarter, with the share of exports declining from 47% in the second quarter of 2020 to 44% in the second quarter of this year, while the share of imports increased from 53% to 56%. The current account deficit reached 6.4% of GDP in the second quarter and reach an average of 4.2% in the two quarters.
The core inflation rate reached 1.6% in the second quarter; however, inflation has become one of the most important factors for balanced economic development. The core inflation rate reached 1.6% in the second quarter; however, inflation has become one of the most important risk factors for balanced economic development. The composite heat indicator for the economy is 0.5, indicating a return to pre-crisis levels, but the economy is still vulnerable, with continuing uncertainty of the epidemiological situation development.
The heatmap
Source: Central Statistical Bureau, Bank of Latvia, Eurostat, FDC calculations