28.11.2014.

GDP growth slightly weaker; private consumption is the main engine

  • Igors Kasjanovs
    Igors Kasjanovs
    economist, Latvijas Banka

In the third quarter of this year, the Latvian GDP growth was slightly weaker, which was mostly related to developments in the external markets. Private consumption remained the main driving force behind growth. Operational information indicates that in the last quarter, the Latvian economy will continue to expand.

According to the data of the Central Statistical Bureau, the real gross domestic product (GDP) grew by 0.5% (seasonally adjusted data) in the third quarter of 2014. That indicates that the adjusted data have not brought about a substantial change in evaluation compared to the flash estimate published a month earlier. Meanwhile, the calendar-adjusted GDP has increased by 2.4% year-on-year. Thus it can be quite safely stated that, in terms of growth, 2014 has been weaker for the Latvian economy than the previous ones. The slowing of growth, however, has mostly been related to external factors (the weak growth in the euro area; the shrinking Russian economy; economic sanctions) and less to the unfavourable impact of domestic factors (shrinking of the metals sector; unfavourable changes in legislation affecting the construction and real estate sectors).

Private consumption (or household expenditure) persists as the growth driving factor (+2.1%). In the third quarter, private consumption accounted for the greatest contribution to economic growth. The rise of private consumption and its role as the leading force behind economic growth are hardly surprising: in recent years, the rises in employment and average salary have managed to ensure a rise in salary fund, which is the main factor determining household expenditure. Moreover, judging by the data of the rise in salary fund, an even greater activity of households in making purchases would have been expected. Yet the negative geopolitical situation as well as the previous lessons drawn from the economic crisis have made households more cautious. There are indications that this year household accruals have increased, which is reflected in the rate of rise in private consumption lagging behind the rise in real disposable income.  This should be borne in mind when analyzing the future prospects of private consumption. On the one hand, as economic growth slows, the rise in salary fund may also diminish. The latest employment data moreover point to demographic trends as likely to have a negative impact on the economy. On the other hand, at the moment when the confidence of households in the future improves, accruals may be spent, providing an additional stimulus to economic growth.

Although the beginning of 2014 was relatively hopeful, the annual rate of growth in investment or gross equity capital once again turned negative (-1.9%) in the third quarter. Investment performance has been disappointing lately – apparently, the aggravation of the geopolitical situation has left its traces in the mood of investors and their desire to take on additional risk. This is also evidenced also by the full load of production capacity (highest in the fourth quarter of 2014 in the post-crisis period) in manufacturing, which theoretically would mean that investment activity should be on the rise. Recently, the part of investment related to construction has (investment in housing fund, infrastructure, hotels, administrative buildings etc.) been growing slightly faster, whereas investment in new equipment has increased less. Yet there are grounds for optimism: in the course of the last quarter, despite the uncertainty caused at the beginning of the year by the Russian/Ukrainian crisis, entrepreneurs have announced a number on new investment projects that should appear in statistics in the very near future.

External trade data are the ones that most register the turbulence in the external environment.  The amount of real exports has increased only slightly, by 0.3% over the year, whereas imports have dropped by 1.1%. The drop in the annual growth rate of real exports is hardly surprising: it was in the third quarter that the Russian sanctions were introduced having an adverse effect on the prospects of Latvian exports (particularly in the food sector). At the same time, it should be noted that the total export dynamic is little affected by the above sanctions: the effects of Russian sanctions can be seen in some exports to this neighbouring country, whereas the total export contraction is more related to the overall weakness of the economic situation both in the euro area countries and in Russia.

In a breakdown by sector, the unexpectedly weak performance of construction (+0.6%) deserves mention. Activity remains comparatively vigorous in the construction of residential and non-residential buildings, but, in contrast to what was common before, the scale of the construction of engineering structures contracted. That may be related to the fact that the bulk of construction capacity was used in constructing non-residential buildings as well as to the possible completion of one-off large projects. In the "large sectors", trade and industry, performance varies, i.e. growth in trade has been relatively strong (2.4%), and manufacturing, in spite of the economic sanctions, in the third quarter was slightly below zero (-0.6%). The weak performance of agriculture, forestry and fisheries (-5.9%) should be singled out among the other sectors, for this time it also had a substantial negative impact on the total GDP.

The first operational indicators of the fourth quarter are positive. The confidence indicators aggregated by the European Commission improved in October and November after a slight deterioration in the previous quarter, which was apparently related to the economic sanctions introduced by Russia and to election-related factors. The retail trade data for October (+1.5% compared to September) are positive. The cargo amount handled in Latvian ports was also good. The above factors indicate that in the last quarter of the year, the economy is likely to continue to grow.

In the outlook for the medium term, nothing has substantially changed. The Latvian economy will continue to grow in subsequent years, and the growth is likely to be among the fastest in the European Union, thus gradually continuing the process of real convergence. The extent of the growth of the Latvian economy, however, will depend to a great degree on the developments outside the state borders – on the geopolitical tendencies and on the ability of the euro area to overcome its period of weakness.  The last factor will determine the ability of Latvian industrialists/exporters to turn the investments that have been made and the knowledge that has been accrued into exports and added value.

Among the internal factors that will impact the growth of the Latvian economy in the near future, we should mention the potentially adverse impact of the amendments to the Immigration Law and the Insolvency Law on the construction and real estate sectors, as well as the possible resumption of operations at "KVV Liepājas metalurgs" production unit.

APA: Kasjanovs, I. (2024, 29. mar.). GDP growth slightly weaker; private consumption is the main engine. Taken from https://www.macroeconomics.lv/node/2000
MLA: Kasjanovs, Igors. "GDP growth slightly weaker; private consumption is the main engine" www.macroeconomics.lv. Tīmeklis. 29.03.2024. <https://www.macroeconomics.lv/node/2000>.

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