Gross domestic product grows rapidly, because of external developments, the rate will slow down

In the third quarter, gross domestic product (hereinafter, GDP) grew 5.2% year-on-year, according to the second estimate by the Central Statistical Bureau. The seasonally adjusted quarter-on-quarter increase was 1.7%. That means that total GDP for 2012 could grow more rapidly than predicted, with growth hovering around 5.0%. By the rate of growth, this places Latvia first among the European Union (EU) countries.

GDP contributors:

• The greatest contributor to GDP growth was exports (3.9 percentage points - pp). A drop in imports also had a positive impact on GDP (0.9 pp). In the third quarter, the annual growth dynamics of exports and imports differed sharply: exports grew (moreover, in almost all main groups of goods) at a significantly more rapid rate than imports;
• A great contributor to GDP growth was also private consumption (3.5 pp). As the purchasing power of households resumes gradually, their amount of purchases increases, yet the household outlook on possible economic circumstances in the future will continue to be of great significance; the memory of getting burned during the previous crisis is still fresh;
• An additional contribution to growth was also made by gross fixed capital formation or investments (0.6 pp). Even though the contribution from investment is not quite as essential as in the previous quarters, it accounts for a rather substantial part of GDP growth. The investment dynamic is expected to weaken somewhat because of worries regarding European economic developments. An indirect indication is also a small drop in capacity utilization rates in the fourth quarter: manufacturers are planning to load their capacity less, which theoretically diminishes the need for new investment.

In a breakdown by branch, Latvia’s economic growth in the third quarter was still determined by the same branches as before. The greatest contributor to the 5.3% annual growth was manufacturing (0.9 pp), trade (1.4 pp), transportation (0.4 pp), as well as construction (0.6 pp). It is primarily these branches that are expected to continue to determine GDP dynamic. Agriculture likewise deserves a mention: owing to this year’s good harvest, it grew 7.3% in the third quarter and contributed 0.3 pp to the overall economic growth. Substantial growth was reached also by the information and communications services branch (annual growth rate at 12.0%; contribution to growth – 0.5 pp).

What does the future hold for the GDP dynamic? In all likelihood, the fourth quarter will no longer be as positive as the previous ones. Several signs point to this:

• Retail turnover dropped in October; albeit it is just one month, we have to keep in mind that this year the fourth quarter is colder than last year and that may have a reducing effect on household expenditures because of higher heating bills;
• Even though manufacturing posted a small growth in October, the industry overall (including energy and mining and quarrying branches) dropped in size, moreover, the manufacturing growth was accounted for by substantial adjustments in some sub-branches. Developments in mining and quarrying usually are closely correlated with construction, which implies that the activities in construction in the fourth quarter may also have slowed;   
• The October operational data in the transport branch, point to a substantial drop in cargo transport services by rail and a drop in cargo turnover in Latvian ports.

The further development of Latvian economy will much depend on developments of Latvia’s main trading partners. The fact that Latvian manufacturing and export have regained their competitiveness has been attested to by the rapid growth of Latvian economy in 2011 and 2012. Thus, if the external market situation if favourable, the Latvian economy could continue on its path of relatively rapid growth. We have, however, integrated with the total European economy to a greater degree, which means that we will not be able to avoid problems in Europe completely. In 2013, the economic growth rate is expected to slow down: this will result from a weaker export situation compared to this year. 

On the other hand, GDP growth will be stimulated by the approaching end of the period of EU fund programming (EU funds are being utilized more actively), which will ensure growing investments. Based on the gradually improving situation in the labour market, the improved purchasing power of households will support private consumption growth. Thus, in all probability, the Latvian GDP growth will remain among the fastest in the EU in  2013 as well.