Strautiņš: 2022 was the worst year for Latvian consumers in more than ten years

For consumers, the millstone will be removed, but the imprint will remain, this is how the chief economist of “Luminor” bank Pēteris Strautiņš says about economic processes.

“The year 2022 was the worst year for Latvian consumers in more than ten years, judging by changes in real wages. The purchasing power of average wages decreased by about a tenth last year. However, real retail turnover increased by 4.1% last year. About how the amount of its money changes , which people can afford to spend on non-essentials, is illustrated quite well by trade in goods other than food and fuel. It grew by 8.6% last year. This picture becomes even more amazing when we learn that the amount of household deposits last December for the first time exceeded 10 billion euros, growing by 5.2% during the year. Maybe business owners massively transferred money from company accounts to private ones? No, because the amount of deposits of private companies also crossed the “round” border in December, exceeding six billion euros.

To make the picture of contradictions complete. The mood of Latvian consumers seems to be strongly pessimistic. The total index of consumer sentiment in December was -32.8 points. That’s not saying much in itself, but the mark is much closer to the all-time pessimism (-47.1) than the historical average (-8.1). People say they are very, very pessimistic about the future of the country’s economy. Maybe.

It is possible that the return of consumers to “physical” stores from the Internet world helps the data of retailers to look better, statisticians are having a hard time with what is happening there. The data says that in 2020, when the pandemic started, sales in online stores decreased by 3.6%, which is extremely hard to believe. However, food trade also increased last year, albeit slightly – by 0.4%.

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The data announced today gives the feeling that we do not really understand what happened in the Latvian economy last year. Do they help you understand what might happen in the future?

Last year the overall picture in trade was quite favorable, but in December sales were down by 0.4% compared to the previous December. It is very likely that the first half of 2023 will also be in the negative. There will be a rise or fall in certain months, depending on the end-of-pandemic jerky base effect curve, or turnover changes from a year ago. Right now, consumers are most affected by the large bills for energy consumed at home – heat, electricity, gas and firewood. Gas prices in stock exchanges and firewood prices in woodlots are already falling rapidly, but stocks have been purchased and long-term contracts have been concluded. A large number of regional heating companies have already announced the reduction of tariffs, but the biggest impact is on Riga Heat, it allows the reduction of tariffs, starting from March or maybe later, depending on the amount of consumption.

Although one can expect an increase in real wages in the 1st quarter of this year compared to the previous quarter, the consumer price index does not take into account seasonal changes in the structure of consumption. Therefore, it can be said that we are currently going through the harshest moment of the purchasing power crisis caused by the war. In the second half of the year, the cost of covering basic needs will decrease rapidly, wages will continue to grow, so you can already count on a rapid increase in consumption. However, in the year as a whole, the real growth of retail sales could be a couple of percent, so rather less than in 2022. On the other hand, due to much lower inflation, the turnover in monetary terms will grow much more slowly than last year, which could be the most important factor for the traders’ own feelings about the success of their activities.

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The following figures illustrate how rapidly our country’s total energy import bill is shrinking. The average price of electricity in the Nordpool Latvia area was 468 euros in August, 271 euros in December, and 101 euros in January so far. The drop in gas prices is difficult to track, currently the TTF index for delivery after a month is 54 euros, but at its highest point it exceeded 300 euros, last year’s average gas price was 133 euros. However, it is necessary to wait for the price drop to reach consumers. The millstone of energy prices is being removed from the necks of consumers, but the imprint will remain for some time. In 2023, real wages will most likely increase in general, but much less than they decreased in 2022. The recovery of the lost purchasing power will take place in 2024, then it could be very rapid.

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