GDP continues growing, but at a slower pace than before

The Latvian economy is still growing, but the rate of growth has slowed down somewhat, which has been determined by the developments in our most important export markets. Currently, growth is primarily based on domestic consumption, whereas in the future, the ability and desire of entrepreneurs to raise investments will play an increasingly important role.

According the flash estimate of the Central Statistical Bureau (CSB), gross domestic product (GDP) in the third quarter grew 0.4% quarter-on-quarter (seasonally adjusted data). Year-on-year, GDP in the third quarter increased by 2.2% (seasonally adjusted data). Albeit the quarter-on-quarter growth has become slower, the Latvian economy continues on the path of growth.

As of this data publication, the GDP flash estimate becomes available ten days earlier than usual. On the one hand, it improves the timeliness of the availability of data, but, on the other hand, the flash estimate has been made on the basis of a narrower scope of data. Therefore, the full GDP estimate may differ more radically than usual from the flash estimate.

During the third quarter, the geopolitical situation in the region deteriorated sharply (economic sanctions introduced by Russia), but several factors pointed to the possibility that economic growth in this quarter as well may have been relatively strong. Owing to growing household incomes and, possibly, to the good tourism season, retail trade posted a rise in turnover (0.6% quarter-on-quarter, or even more rapidly if automobile trade is included). The industrial indicators (including the electricity and gas supply and mining and quarrying) in two months of the third quarter were relatively good. Also, in expectations of amendments to the Immigration Law, the activity in real estate transactions grew substantially in July and August, which also acted to stimulate some construction of housing and that, in turn, gives rise to hopes for an increase in the construction sector added value. Among the factors having a negative effect on growth, the transport branch should be mentioned: operational data on freight traffic by rail and the volumes of cargoes handled in ports point to a decrease in its added value.

As forecast before, no signals currently indicate a substantial impact of Russian sanctions on the Latvian economy at the macroeconomic level. The export value of some products affected by sanctions dropped in August, yet these are small reductions against the total export amount. A more important negative effect is the overall weak performance of the Russian economy and the drop in the value of the rouble, which, as of the beginning of the year, quite some time before the introduction of the sanctions, had a negative influence on those Latvian producers and exporters whose market is in this neighbouring country. The rouble has been rapidly weakening over recent months as well, which exacerbates the concern regarding the prospects of Latvian industrialists in that market.

It is also obvious that recently Latvian economic growth has turned more to domestic resources. The main contributors to growth are the branches that are related to domestic consumption – trade and construction. The branches connected to the export markets – manufacturing and transport and storage industries show signs of weakness. That is related both to aforementioned weakness of the Russian economy and the still uneven and weak growth of the euro area countries. In the second quarter, the economy of the euro area remained at the level of the previous quarter and the operational information regarding the third quarter (industry, trade and market research data) indicate that no important positive developments can be expected in the economy of the euro area.

For the time being, the Latvian economy is driven by the success of previous years in the export markets, which has let wages go up and thus supports the current rise in private consumption. Yet it is clear that without stronger export performance in the future, the trend in rising wages will abate, which, in turn, will impede the rise in private consumption. In view of this, the investment projects directed at making production more varied and increasing productivity announced by various companies give rise to optimism. It is the desire and ability of businesses to invest that will be the determining factor in the growth of the Latvian economy at the moment when the contribution of private consumption has diminished.

The second estimate, which will provide more information regarding branch dynamics as well as the expenditure side of GDP will be published by the CSB on 28 November. On 23 December, the third GDP estimate will be published, taking into account the results of balancing the quarterly national accounts.