Like other EU member states's independent fiscal institutions, the Council quarterly prepares the Latvian economy heatmap. Observations from 2000 1st quarter till 2022 4th quarter are available in MS Excel format here.
In quarter IV of 2022, the composite heat map index was 0.5, but on average in 2022 it was 0.6. Such a value was achieved despite significantly slower GDP growth, which was 0.5% in quarter IV and 2% in 2022. This shows that despite the turbulence of recent years, in the perspective of long-term observation, the economy is quite stable. However, in the short term, several negative signs have intensified, including persistently high inflation and core inflation, the heating in the labour market, low lending activity, and lack of demand in certain sectors. We will explore these and other factors affecting the economy's temperature in the following analysis.
The average monthly gross wage of workers in the IV quarter increased by 8% compared to the corresponding period of the previous year. In the year as a whole, gross wages increased by 7.5%. In the final quarter of 2022, wages in the private sector increased by 9.3% and amounted to 1441 euros, while in the public sector, the increase was 4.9% and the average gross wages were 1451 euros, or 10 euros more. Taking into account the high inflation, which reached an average of 17.2% in 2022, it can be seen that the wage growth rate lags behind it by more than two times.
The unemployment rate decreased slightly in the IV quarter and was generally low (6.8%). On the other hand, the employment rate remained stable (64%), which is only slightly below the pre-pandemic level. Compared to the fourth quarter of 2021, the number of vacancies decreased by 16.2%, but compared to the third quarter of 2022, available vacancies decreased by 13.6%. The number of vacancies, compared to the fourth quarter of 2021, decreased the most in wholesale and retail enterprises (-45%), other services (-44%), water supply, wastewater, waste management (-41%), processing industry (-34%) and in construction (-33%). In the same period, the number of vacancies in the state administration and defence, as well as in agriculture, fisheries and forestry, increased by 14%. The number of vacancies in accommodation and catering, as well as in real estate operations, increased by 7%.
The slowdown in economic activity is also reflected in the rates of capacity utilization. In quarter IV, this indicator was 73.3%, decreasing by 3.4 pp. compared to the final quarter of 2021, but compared to the III quarter of 2022 - the decrease is by 2.4 pp. In comparison with the countries of the Eurozone, capacity utilization indicators in Latvia have been lower by about 6.5 pp in recent years.
The lack of demand in the construction industry was a significant factor limiting activity in the sector. This factor is indicated by 30% of surveyed companies, which is by 4.3 pp. more than in quarter III. In general, insufficient demand and bad weather conditions were the main factors limiting construction in recent quarters. In industry, the lack of demand negatively affected 37.7%, which is 8.3 pp. more than in quarter III. In addition to the factor of lower demand, entrepreneurs in the industrial sector point also to financial difficulties as a limiting factor. Companies in the service sector generally pointed out that there are no limiting factors. However, the importance of the lack of demand factor is starting to increase for some companies in this sector as well, and 25% of companies pointed it out in the 4th quarter.
Economic sentiment as a whole was 92.4% in the IV quarter, which is the lowest rate since the beginning of 2022 and is significantly lowered by the pessimistic mood of consumers on the background of high inflation.
Lending activity in Latvia is generally low and there is no significant increase in the quarter. In quarter IV of 2022, the volume of loans issued increased by 6%. The amount of loans granted to private non-financial companies increased by 8%, and to households by 4.3%, including mortgage loans which increased by 4.6%, consumer loans increased by 11%, while the amount of other loans granted to households decreased by 10 %.
The trade balance has deteriorated sharply since the second quarter, largely due to a price shock in the energy market following Russia's invasion of Ukraine. At the same time, the export growth rate decreased every quarter, increasing by 16% in the final quarter of the year, which is half less than in the first and second quarters of this year. The share of exports fell from 48% in the fourth quarter of 2021 to 44% in the last quarter of this year, while the share of imports increased from 52% to 56%, respectively.
The current account deficit in the fourth quarter was 3.2% of GDP, improving by 2.6 pp compared to the third quarter. In its structure, primary income accounted for a surplus of 0.8% of GDP and secondary income for a surplus of 1.6%.
The core inflation indicator continued to grow, reaching the level of 10.4% in the IV quarter. This shows that the rise in energy and food prices significantly affects the entire structure of the economy and inflation is starting to take root. Taking into account that the prices of energy resources can remain high for a long time, as geopolitical risks do not decrease, it must be assumed that high consumer prices will be one of the main factors of economic imbalance for some time to come.
The house price index was 9.1% in the fourth quarter, which was the lowest since the second quarter of 2021. The decrease compared to quarter III of 2022 was by 4.5 pp. However, in the final quarter of 2022, the price index of new houses rose sharply, reaching 19.4% compared to the third quarter (+7 pp.). The price index for used houses fell to 6.6% compared to the third quarter (-7.4 pp.).
Source: Central Statistical Bureau, Bank of Latvia, Eurostat, FDC calculations