Like other EU member states's independent fiscal institutions, the Council quarterly prepares the Latvian economy heatmap. Observations from 2000 1st quarter till 2023 3rd quarter are available in MS Excel format here.
In the third quarter of 2023, the composite heatmap index was 0.42 and it decreased 0.02 percentage points (pp.) from the previous quarter. There has been no significant change in the index for several quarters. Core inflation rates are still higher than in the Euro area, however, average gross wages have started to outpace inflation rates, the industrial sector is facing a lack of demand, while export decline is holding back economy growth. We will explore these and other sections affecting the economic heat map in the analysis below.
Average monthly wages of workers increased by 11.8% in the third quarter, compared to the corresponding period of the previous year. The increase from the previous quarter is 1.5 pp. In the private sector, compared to the third quarter of the previous year, gross wages increased by 11.1% and amounted to 1546 EUR, while in the public sector the increase was 13.7% and the average gross wage was 1564 EUR. The median gross wage in the third quarter was 1 250 EUR, while the median of net wage was 932 EUR.
Unemployment rate in the third quarter in Latvia was (6.5%). In the same period, the unemployment rate in EU countries has been lower (6%), but in Euro area countries (6.6%), thus in the case of Latvia, the unemployment rate is low and in line with the unemployment rate of Euro area countries.
The employment rate in the third quarter was (64.7%). Compared to the second quarter of 2023, it grew by 0.3 percentage points. The employment rate in this quarter has levelled off with pre-pandemic levels, thus despite the recession in the economy, labor resources are under pressure at levels that were on average in 2018-2019, with many sectors facing shortages of the adequately skilled labor force. Overall, 890.9 thousand people were employed in the labor market in the third quarter of this year, which is 8.6 thousand less than in the corresponding quarter of the previous year, but compared to the second quarter of 2023, the number of employed has increased by 3.3 thousand.
Compared to the third quarter of 2022, the number of vacancies decreased by 2%, but compared to the second quarter of 2023 - available vacancies increased by 1%. In the third quarter, 25.4 thousand vacancies were unfilled. The number of vacancies decreased the most in manufacturing, construction, IT, and communication services compared to the third quarter of 2022. The number of vacancies in public administration, administrative and service activities, as well as in transport and storage companies increased the most.
Capacity utilization level was 72.7% in the third quarter, decreasing by 1.1 percentage points comparing with 2nd quarter. Capacity utilization rates have a downward trend both in Latvia and in the Euro area, despite minimal improvements in the second quarter. This indicates to Latvia, as a small and open economy, the risks of declining external demand and continuation of export reduction.
According to the CSB's in-depth research data, demand in the construction sector has improved, but it remains low in industry and services, however, all sectors have a current negative impact of labor shortages. This is evidenced by the companies interviewed by the CSB - the answers registered as a percentage of the interviewed companies.
In the construction sector, the limiting factors have decreased in the third quarter, including the insufficient demand factor - approximately 26% of surveyed construction companies pointed. Compared to the previous two quarters, it is 8.9 percentage points less on average. A more significant limiting factor in construction is the lack of labor force, 29.6% of surveyed construction companies pointed it in the third quarter, moreover, the significance of this factor is increasing. However, most often or 33.9% of surveyed construction companies indicated that there are no limiting factors. In industry, the lack of demand continued to affect negatively 46.3% of the surveyed companies, which is only 1 percentage point lower than in the previous quarter and was also the most significant limiting factor in the sector. However, the situation in industry is not homogeneous, despite low demand in general, 18.3% of industrial sector entrepreneurs indicated labor shortages, while 26.9% did not point any constrains. In the services sector, 38.9% of enterprises pointed, they have not any limiting factors. At the same time, 32.6% of service providers mentioned significant role in the lack of demand. 16.5% of service providers mentioned labor availability as the limiting factor.
The long-term economic sentiment rate was 94.9% in the third quarter, which is 1.2 percentage points higher than in the previous quarter, however, overall, the figure has not been growing significantly for several quarters and is not shrinking either - fluctuating around 94%.
Lending activity in Latvia is generally low, and there is no significant increase during the quarters. In addition to the previously mentioned factors on the supply side, lending is also made unattractive by the ECB's restrictive monetary policy and high interest rates, which currently affect lending on the demand side as well. Data from the Bank of Latvia on loan balances show that in the third year of 2023 their volume increased by 4%, of which households by 2.8%, but companies by 6.4%. On the other hand, the data of the Bank of Latvia on the volume of newly issued loans, which are not reflected in the heat map, show that the volume of newly issued loans for the purchase of housing decreased by 16%, compared to the third quarter of the previous year, other loans to households decreased by 11%, but increased by 13% consumer loans. New loans issued to companies decreased by 9% in the same period.
The trade balance remains almost flat since the second quarter, its deficit in the third quarter was 12.7%-to-GDP and changes from the second quarter just by (-0.2) percentage points. At the same time, export growth rate decreased by 23.4% in the third quarter. This is the largest export decline since Q3 2009. Overall, export share in external trade fell from 44% in the third quarter of 2022 to 43% in the third quarter of 2023, while import share increased from 56% to 57% respectively.
The current account deficit was 5.3 % of GDP, compared to the previous quarter, it worsened by 1.2 percentage points. In its structure, primary income accounted for a deficit of 3.6% of GDP, while secondary income accounted for a surplus of 2.3%.
The core inflation rate in Latvia, in the third quarter, decreased to 8.1%, with a decrease of 1.7 percentage points compared to the second quarter. This level of core inflation is still considered high and exceeds the Euro area indicator by 3 percentage points.
The house price index was 3.2% in the third quarter, the lowest since the first quarter of 2021. The decrease compared to the second quarter of 2023 is by 2.2 percentage points. In the third quarter, price decrease was observed in the second-hand housing segment by 2.8 percentage points, while in the new housing segment prices was not changed since the second quarter.
The heatmap
Source: Central Statistical Bureau, Bank of Latvia, Eurostat, FDC calculations