internal demand

According to the data of the Central Statistical Bureau, the output of manufacturing in November 2012 grew 3.5% (seasonally adjusted data). The annual growth rate in November 2012 was thus 7.9%. Such an increase at the end of the year once again testifies to the ability of Latvian manufacturers to surprise – despite unfavourable developments in the external markets, manufacturing has demonstrated substantial growth.

The 4th quarter indicator updated by the Central Statistical Bureau and its reviewed data on the year overall indicate that in 2011 gross domestic product (GDP) grew 5.5% (5.3% according to the flash estimate made earlier). Thus in 2011 Latvia was one of the European economies experiencing the most dynamic growth – according to the latest published data, in the ES-27 GDP grew 1.5% on average.

As economic stabilization fostered the cooperation between businessmen and banks, a rise in the balance of loans granted to businesses was observed in July for the first time after dropping for a protracted period. Lending to households continued to shrink however, therefore the total bank loan portfolio still contracted slightly, but the annual rate at which domestic lending dropped improved (from 9.2% in June to 8.5% in July).

In May 2011, Latvia's activity in the foreign trade of goods was once again on the rise compared to April. Both exports and imports volumes of goods rose month-on-month, and the annual growth rates remained high at 38.8% for exports and 32.7% for imports over a year.  

The trade turnover of Latvian goods posted a 7.1% month-on-month contraction in April 2011: the steep rise of the previous month was followed by a decline in the volumes of both exports and imports of goods, while a high annual growth rate was sustained, with export growth at 27.6% and that of imports at 29.9%. The balance of trade in goods improved notably, and the deficit dropped to 77.1 million lats.

Despite the persisting stability of the financial markets and continued rapid growth in the export-related industries, the rising inflation, particularly under the influence of the leap of fuel and electrical energy prices and increased tax burden, has an increasingly pronounced effect on domestic demand. Parallel to that, a drop in deposits or stagnation has been observed for some months. Both lats and foreign currency deposits were down in April. Thus for a second consecutive month the overall money supply has also dropped in April.

The Central Statistical Agency's (CSP) updated indicator regarding the third quarter of 2010 points to a growth, for the first time since the beginning of the recession also annually, increasing 2.9% year-on-year. The increase was determined not only by the lower base of the previous year but also by the small yet persistent growth for a third consecutive quarter.

The work of previous months found a positive reflection in the data of processing industry: the optimization of production costs and development of new products (e.g., in food, wood, pharmaceutical industries) have given rise to opportunities for entering new markets as well as opportunities for domestic-demand oriented branches to reorient themselves to exporting.

In keeping with the previously observed trend, the retail turnover diminished (by 2.3%) in November. The weak domestic demand was still determined by dropping incomes and reduced benefits for those having the unemployed status for a prolonged period of time as well as uncertainty as to the possible future changes in the family budget. Retail is one of the branches of the economy that will continue to contract and will feel the positive influence of renewed exports later than the branches that derive direct income from exports.

In several European countries recovery of the economy is beginning to be observed, as the real GDP, after dropping for several quarters is showing growth in the third quarter over the previous one. International institutions are predicting economic growth for the next year both in the world at large and in the euro zone. Along with the improvement in the Latvian price and cost indicators, it allows us to predict a gradual settling of Latvian exports and thus also processing industry on the road to stable increases.