The Latvian Economy - September 14, 2011
Household incomes rise – to consume or to save?
- The labour market continues improving – employment and wages are rising, while unemployment is decreasing despite a higher activity rate. The purchasing power of households is thus improving slowly, even accounting for tax rises and inflation. Consumer optimism has been increasing. The improvements, though, remain very uneven across different segments of society.
- This improvement is resulting in private consumption growth. Rising consumer loans and emigrants’ transfers are also stimulating household spending. Another likely factor promoting consumption is income tax evasion. Unfortunately, the household savings level remains very low, and the savings rate most likely diminished in 2010 - 2011 after rising in 2008-2009. Although the economy has become more resilient, households remain exposed to a negative shock to the economy.
- Economic growth will slow, undermining job creation. Consumer confidence is likely to worsen as well, hindering the bargaining power of employees and, thus wage growth, and increasing precautionary savings. Given the growing uncertainty globally and locally, it is extremely important to build up ”safety cushion”, and the challenge for households is to find the right balance between consumption and savings.