Eresko Artur · There was a time and prices were scaling down

Eresko Artur · There was a time and prices were scaling down

24 November 2015

An abnormally warm autumn in Latvia and extremely favourable oil prices allowed the Latvian producers to scale down prices for their produce notably. That means to gain competitive advantages in external markets.

As they calculated at the CSB, in October 2015 as compared to October last year the producers’ prices reduced by 2.1%. Why?

Already now, at the close of November, it is absolutely obvious: autumn 2015 has become in Latvia one of ten warmest ones for all time of observations as from 1881. So, anyhow, the weather forecasters from the Latvian Environment, Geology and Meteorology Centre say.

Under such conditions the Latvian undertakings, rather thrifty as it was, considerably reduced consumption of heat, payment for which is the largest item of the production facilities, office maintenance costs. Subsequently, the manufacturers really saved this autumn and, consequently, scaled down the prime cost of their produce.

But this is far from being the only area for savings. The sharp fall in global oil prices entailed lowering in price tags at the Latvian fuel filling stations. In our situation, the fall in price for A95 petrol made more than 15% - from 1.20 euro to 1 euro per litre.

However, if to take the Latvian economics, then, of course, the biggest winners from unusually warm weather are, of course, the constructors. Commonly in cold weather the works are either discontinued or extra-budgetary resources for heating-up facilities have to be spent. This autumn the constructors without looking back at precipitation and in some directions managed to construct new facilities or repair old buildings almost two times as many as in cold years.

At the domestic level this phenomena is favourable from the unemployment point of view as well. Commonly the number of workers placed on enforced leave in autumn /winter period increases. But this does not happen now as confirmed also by the labour market statistics.

Interestingly also that drop in production of the Latvian goods oriented to the domestic market made up 3%, while the manufactured goods going for export became cheaper just by 1.1%. This can be explained by frozen demand in Latvia, which, in its turn, is entailed by careful psychology of a Latvian consumer, who has not forgotten the shocking consolidation of the specimen of 2008-2009, as well as by a pure physical reduction in the number of consumers, who emigrate from the eastern shore of the Baltic Sea to the western and farther.

It is fair to say that the CSB’s calculations are based on polling of just 640 undertakings, while in Latvia the number of commercial companies with the entry ‘Production’ in corporate charters is a hundred time bigger. Nevertheless, the figures of statistics in this particular case reflect the actual state of things.

Artur Eresko (Артур Ересько) - Candidate of Economic and Legal Sciences.

Related items

Eresko Artur · Eurozone development in 2017: slowly, but consistently
If for European policy the year 2017 promises to be complicated (elections, Brexit, unpredictable relationship with new government of the USA, trade wars with Russia), while in the economic aspect the new year promises to be quite not bad. At least, for the eurozone countries.

The past year was distinguished by controversial signals concerning the economic growth in the eurozone, however, in general, as a result, positive news prevailed. The eurozone in 2016 demonstrated its soundness under the influence of internal and external shocks.

Despite strong tension in the market in January and February of the past year, Brexit and continuing weakening of the global market, trust of business and of consumers in the eurozone remained amazingly stable. GDP, according to a tentative forecast, grew in 2016 by substantive 1.6%. So, the past year became the second year of a visible growth of the zone of Euro.

Today we can presume that the moderate rates of recovery of the economy of the currency block shall preserve also in 2017 – GDP of the region shall grow yet by 1.5 %, at the least.

The key risk factor for the European economics this year is the policy. Europe this year will again encounter a clear-cut political uncertainty, which might affect determination to invest.

This is about elections scheduled in Europe to 2017: in the Netherlands, in France, in Germany and, probably, in Italy. After the populist surprises in Great Britain and in the USA a similar result in Germany cannot be ruled out.

Anyway, in Germany the parliamentary elections ought to take place this year, which will result in the election of the chancellor of the country. France will elect its president, in the Netherlands — parliamentary elections. In Italy the situation is different: resigned at the end of the last year from the post of Prime Minister Matteo Renzi did not exclude in the middle of December that early parliamentary election might take place in June 2017.

Nevertheless, so far we can forecast the growth of investments in the eurozone this year by 2.5%. This is, however, slightly less than 3%, achieved in 2015 and in 2016.

While inflation in the eurozone is forecasted at the level of 1.5-1.8 per cent.

The eurozone has lived for several years under the low inflation condition, even the risk of deflation was emerging, which threatened the process of recovery of economics of the region. This year would considerably weaken or even remove the low inflation risk.

Here it is important to mention that in December last year inflation in the eurozone already jumped by half a percentage point – to 1.1%, which practically was completely caused by oil price hikes. There are not yet any signals of a new fall in price of a barrel, and there is no reason to be worried of a stop of rise in consumer prices in the eurozone countries.

Artur Eresko (Артур Ересько), candidate of Economic and Legal Sciences.
Eresko Artur · Foreign trade: the deficit shrank to the minimum
The jerk of woodworking industry in September failed to compensate hard landing of export of oil and grain crops. In general, export of Latvian goods in September as compared to the same month of the previous year declined by 2.7%. Over nine months of this year the fall in export of goods made up 1.6% as compared to nine months of 2015.

If to consider in annual terms, then the largest share of contribution to September fall is attributable to re-export. Exactly the fact that the volumes of export of minerals (oil and petroleum products) continued falling (-33.1% in September). This partially can be explained by recent official message on gradual termination of export of Russian petroleum products through Baltic ports. Based on sentiment prevailing in Russian state-owned enterprise Transneft, as well as determination of the Russian party to load, first and foremost, its ports at Saint Petersburg and Leningrad Oblast, most probably, no positive trends in this industry are forthcoming either.

An annual growth of Latvian export is weighted down by export of food from Latvia as well, which shrank by 6%. This is connected with a major fall in export of grain crops (-54%). Here there are two reasons. First, the last year’s crop appeared to be record-breaking on many articles. Accordingly, the current – usual - crop is losing in terms of volumes of harvested and exported grain crops. Second, because of favourable weather the export of grain crops this year began one month earlier than usual: in August the annual growth in export of grain crops grew seven times, but in September noticeably shrank.

Apart from oil and grain crops, the decline in export was also marked in such segments as mechanisms and equipment (-8.2%) and metal ware (-6.3%).

In its turn, woodworking keeps on delighting, where the annual growth of export achieved 10.1% (inter alia, the gain in export to Great Britain made up 26%).

Fears associated with Brexit doubled the energy of Latvian exporters of wood and wood products, who are hurrying to sell as much as possible before exit of Great Britain from the EU. But the date of this monumental for Europe event becomes more and more uncertain. So, the Supreme Court of Great Britain took a decision that the government may not start the Brexit procedure without approval by the Parliament. What would eventually decide the servants of British people is unknown. Anyway, it means postponing of the moment of kiss off, which is positive news for Latvian exporters.

Moreover, the general growth was facilitated by export of furniture (30.9%) and chemical products (7.6%).

Nevertheless, the deficit of foreign trade of Latvia in September shrank to the lowest over the recent year level. In September the deficit of foreign trade in goods made up 87.1 million euro and this is the lowest index since 2010.

Artur Eresko (Артур Ересько), candidate of Economic and Legal Sciences.
Eresko Artur · Construction projects are waiting for a signal from Brussels
Latvian statisticians have calculated the number of houses, workshops and roads that have not been built.

Last year, in comparison with 2015, the volumes of construction products in comparable prices for calendar-aligned data decreased by 17.8%. In absolute terms, the fall was 318 million EUR.

Overall decline does not look so terrible when looking at construction of engineering facilities in 2016 where 33.3% collapse was recorded.

In 2016, the decline was noted in almost all areas of engineering construction, including ports, waterways, dams and other hydraulic structures - by 31.3%; bridges, overpasses and tunnels - by 29.9%, motorways, streets, roads, runways and railways - by 29.5%.

There are, however, certain areas where life is getting better. Volume of construction of main pipelines, communication lines and electric power transmission lines has increased by 6.2%.

Not everything is so bad in the residential sector. During a year, the increase in construction of residential buildings was 2%. Moreover, if compare the fourth quarter of 2016 with the same period of 2015, then can speak of a boom: construction of residential buildings has increased by 36.5%!

However, emergence of new apartments and power lines could not change the overall sad trend. Latvian construction industry depends too much on the orders of public sector, which in turn is strongly dependent on EU funding. This financing in 2016 was the most meager in recent years.

Thus, development of construction industry is hampered by low utilization of EU structural funds. Although for 2016 a decline in cash flow from the EU coffers was predicted, at the beginning of the year it was impossible to foresee that the financial flow would become so low and, as a consequence, would affect so much the volumes of construction. As a result, the current drop in construction is comparable to the fall in output in the 2008-2010 crisis.

Question of future growth of the construction industry should be put not to Latvian builders but to Brussels bureaucrats who have demonstrated their unpredictability in transferring European subsidies to poor EU countries.

At present, European financing is expected to be received in the second half of 2017. Then new construction sites will appear in Latvia.

It can be also predicted when these construction projects will begin to close again. In 2020, European financial assistance will be sharply reduced. It can be said for sure. But it is, unfortunately, impossible to assert that by this time also private and public investments in the construction sector will grow sharply.

Artur Eresko (Артур Ересько), candidate of Economic and Legal Sciences.