Uncertainty in global economy may slow lending growth - Purgailis

RIGA - Uncertainty in the global economy, fueled by the conflict in the Middle East and a series of decisions on US tariffs, could slow down lending growth this year, Karlis Purgailis, chief economist at Citadele bank and chairman of the board at CBL Asset Management investment management company, predicted in an interview with LETA.

He admitted that currently neither companies, investors, nor citizens can predict with certainty what will happen in the future, and such a prolonged environment of uncertainty is not conducive to healthy development.

"Every new negative shock causes people to slow down, not spend, and postpone big purchases, which is not conducive to growth in the economy. The same is true for entrepreneurs. When one thinks about investing more in development, or loans to expand one's production, this uncertainty causes makes one worry, and one wonder if now is really the right time to do it," Purgailis said.

He reminded that in all three Baltic countries, purchasing power has improved significantly after the big jump in inflation caused by the war in Ukraine, but only in Lithuania has consumption increased. In Latvia and Estonia, changes in consumption are relatively small and only started in the middle of last year. Until then, there was stagnation and waiting for "what would happen next". Thus, household bank deposits and savings have grown quite rapidly and there is a sense that consumption is waiting to "break out", but every new piece of negative news puts the brakes on it.

With companies postponing investment and people postponing consumption decisions, the economy is stagnating, Purgailis said.

He mentioned that at the end of 2024, when interest rates started to fall quite sharply as a result of European Central Bank policy, demand for mortgages soared that there was a sense deferred demand for home purchases. Now, since the end of last year, the amount of newly issued credit has already started to shrink.

"Now this war, the increase in fuel prices, the fear that interest rates could rise again are not encouraging people to take out mortgages and buy homes. Therefore, there could be a slight cooling in lending," Purgailis admitted.

Similarly, in corporate lending, January's new lending, which excludes refinancing, was below last year's monthly average. This suggests that demand for new loans is also slowing down on the corporate side.

"At the moment, it is demand, not supply, that dictates the volume of new lending, and demand is highly dependent on overall economic sentiment and expectations for the future, which are currently highly subject to uncertainty," Purgailis said.