Slight slowdown in GDP growth in the last quarter of 2013

According to the information published by the Central Statistical Bureau, gross domestic product (GDP) increased by 0.7% quarter-on-quarter in the fourth quarter of 2013 at constant prices (seasonal effects excluded) and by 3.5% year-on-year. In 2013 overall, GDP thus grew about 4.0%. In all likelihood, Latvian economic growth in 2013 was the fastest among the euro area countries.

The possibility that growth in the last quarter of 2013 could lag slightly behind that of the previous quarter was already indicated by operational statistics. Even though production output of manufacturing increased by 2.0% and retail trade turnover by 1.0% in the fourth quarter, a negative impact on GDP growth was exerted by the other industrial branches: mining and quarrying (-2.2%) and power industry (-3.6%). It remains to see the indicators of the other important branches (transport, construction, wholesale trade, real estate, professional services) to get a complete picture of the economy: in all probability, a significant drop in value added has taken place in one of these branches as well.

It should be remembered that GDP flash estimate is based on operational statistics on the output of some branches. A complete GDP picture will become available in a month, on 11 March.

In recent months, the business tendency indicators (European Commission (EC) confidence indicators, PMI etc.) have substantially improved in the European Union (EU) member states. The EC economic sentiment indicators have already shot past the 100 point mark among both the EU (104.7) and euro area (100.9) member states. In January, the PMI indicator in the majority of EU countries (on which this indicator is being aggregated) was above the 50 point mark, which indicates economic growth.

This kind of business tendency information leads to expectations of positive GDP growth in the euro area in the fourth quarter of 2013, moreover, judging by the improved indicators, this growth should be faster compared to the previous quarter. One should not get carried away by positive and hasty predictions, however: business tendency indicators, albeit historically well correlating with the data of real economy, do not always show precision in registering changes in economic activity: they often react too intensely to the economic processes. A case to the point is the data of the fourth century trade and industry: there, an improvement in business tendencies has not found such a convincing reflection. The retail trade volumes in the euro area thus dropped by 0.7% in the fourth quarter, whereas manufacturing data pointed to an increase in output in November but a weakening in October (December data are not yet available but the industry indicators of some euro area countries point to the aggregated indicator for the euro area being close to zero). That indicates that the situation in the euro area is not unequivocally positive. In addition, attention should be paid to business tendencies in the developing countries: recently, the indicators there have been worsening somewhat, including in Russia, where the economic situation has notably turned for the worse. The slowdown in the Russian economy has a negative effect on the Latvian transport branch as well as on those enterprises whose market is primarily Russia.

Latvijas Banka predicts that in 2014, GDP will grow at a pace similar to 2013: by 4.1% (according to data adjusted by seasonal and calendar factors). As before, economic growth will primarily depend on developments in the external markets, yet 2014 will be important also with respect to investment. Investment growth slowed down somewhat in 2013, yet in order to maintain a similar rate of growth in the coming years, new investments are necessary, and they are most needed in the so-called productive capital. Right now, some sub-branches of industry and enterprises are functioning with full load capacity, but the next "leap" will require investments.