Gross domestic product grows in the second quarter, the annual growth rate drops slightly

According to the flash estimate by the Central Statistical Bureau, gross domestic product (GDP) in the second quarter of 2014 grew 1.0% quarter-on-quarter (seasonal factors excluded). Year-on-year, GDP grew by 2.5%.

A positive development in the second quarter was already suggested by the operational branch statistics. Manufacturing output grew 3.7% quarter-on-quarter and retail trade turnover by 2.2%. The construction branch output increased by 16% year-on-year, probably mostly determined by active construction both in the residential and other sectors (hotels, industrial buildings, administrative buildings etc.), impacted both by the realization of EU fund projects using financing from the previous planning period and the change in residence permit regulation, which will take effect on 1 September and which acts to speed up construction of residential buildings. The confidence indicators aggregated by the European Commission also did not deteriorate seriously, even improving in some sectors.

The main topicality these days, of course is the sanctions enforced by the Russian Federation that provide for a ban on the imports of certain food products. Contrary to what can be learned from the mass media, mostly particular combined nomenclature codes are subject to the ban.  Thus the sanctions are pronouncedly selective and, in 2013, would have applied to a mere 0.53% of total Latvian goods exports. In the form they have taken up to now, the sanctions do not affect the overall Latvian economy in a fundamental way. Yet the possible impact of these sanctions on the regional economy and particular enterprises should not be ignored. The sanctions will be sharply felt by those enterprises of the foodstuffs industry whose main market was the Russian Federation. In some cases, a rapid reorientation to other markets is possible, but in the search for new markets in this industry usually take a relatively long time.  It should also be kept in mind that the introduction of formal sanctions does not preclude the possibility that the so-called informal sanctions will become stricter, i.e. customs procedures, a stricter enforcement of phyto-sanitary standards etc. In addition, the amount of cargoes transported will be impacted: foodstuffs are mostly transported by automotive transport. The consequences of increased competition in the region can also not be  excluded: the producers of neighbouring countries will also face difficulties caused by the sanctions and be forced to look for new markets, including increasing their sales in Latvia.  

The effect of the sanctions should be evaluated not only in terms of their direct impact on external trade but also in terms of their impact on the economic moods of households and businesses: such an escalation in the geopolitical situation can lead to a rise in accrual levels and to postponed investment projects. Further escalation in the situation can also not be excluded, which would mean an extended list of the banned goods.

In all likelihood, it will be the competitiveness factor that will determine whether the businesses affected by sanctions can overcome them, for, irrespective of the possible help and compensations from the European Commission, they will not be able to fully replace the market and will come will come after a lapse in time.

The full GDP evaluation that will encompass more enterprises will become available in about a month, in the second half of September. It will also include information on branches that are not included in the flash estimate and will make available data on the use of GDP, which will provide a fuller picture of the dynamic of private consumption and investments. It is quite possible that, beginning with September, the Central Statistical Bureau will publish GDP in accordance with the ESA 2010 methodology, which can slightly change the GDP time series.