Adaptability and availability of support dampens the drop in GDP growth

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During the second wave of the pandemic, the state of emergency has been in force for a longer period of time; however, according to the European Commission (EC), the economic agent confidence was less pessimistic overall than during the first wave last year. Clarity and confidence about the availability of government support differ considerably from those observed during the first wave; moreover, adaptability of economic agents has also improved notably. All this has influenced economic growth.

According to the flash estimate of the Central Statistical Bureau (CSB), in the first quarter of 2021 GDP dropped 2.6% quarter-on-quarter (as compared to 7% in the second quarter of 2020) and 2.1% year-on-year in seasonally and calendar adjusted terms. Some sectors seem to be rather flexible in their adaptation to the restriction changes.

Restrictions have an uneven impact on the development of different sectors. In the first quarter, fairly tight restrictions were imposed on many services sectors providing services in person; besides, remote services are not always a feasible/good enough solution.

According to the flash estimate by the CSB, the goods producing sectors have seen a relatively better situation than the services sectors in the first months of this year as well; this does not mean, however, that they have fared very well.

In the first two months of 2021, the performance of manufacturing was weaker than at the end of 2020. Several industries faced a shortage of raw materials and components as well as issues with the availability of freight containers. This affected the production volumes and costs. Problems were observed in metalworking and mechanical engineering, wood industry, manufacture of electronic and electrical equipment, etc. This year started with a real winter bringing both snow and cold, therefore the construction sector was unlikely to repeat its 2020 performance.

Retail trade growth provides quite a good picture of monthly changes in restrictions: when retailers had to close their doors to customers, one could see whether, speaking metaphorically, a large window or just a small one for ventilation was still left open.

Already in February when the range of products allowed to be sold in-store was expanded and certain shopping venues were fully opened for shopping in person, the turnover of those retailers increased.

This trend continued in March (the new regulation was not in force for the whole month of February), with the retail trade turnover in constant prices growing by 6.9% and 3.2% month-on-month and year-on-year respectively. The remote retail trade also demonstrated adaptability; its volume increased in each pandemic wave. Since the conditions for retail trade in person changed again in April when the state of emergency was lifted, the result of many points of sale resuming their operation is likely to be seen in the next month's data. This can also be seen in the confidence data for April published by the EC: the economic agent sentiment, that in services and retail trade in particular, showed a sudden improvement.

With the share of vaccinated persons expanding and the morbidity rate declining, gradual easing of restrictions would ensure a rapid boost in consumption, with economic agents making use of the precautionary and forced savings accumulated during the pandemic. Consequently, the recovery of the economic growth in the second quarter will probably be gradual, but is likely to be quite fast in the second half of the year.

Detailed data on GDP expenditure and changes in value added by sector are expected at the end of May.

APA: Paula, D. (2022, 13. aug.). Adaptability and availability of support dampens the drop in GDP growth. Taken from https://www.macroeconomics.lv/node/5208
MLA: Paula, Daina. "Adaptability and availability of support dampens the drop in GDP growth" www.macroeconomics.lv. Tīmeklis. 13.08.2022. <https://www.macroeconomics.lv/node/5208>.
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