After the weak performance in Q2, GDP growth in Q3 gives rise to optimism

According to the flash estimate by the Central Statistical Bureau (CSB) gross domestic product (GDP) of Latvia grew by 1.2% in the third quarter of 2013  (quarter-on-quarter, seasonal factors excluded). Meanwhile, the rate of annual growth was similar to that of the first two quarters of the year (+4.2%), which implies that the Latvian economy is still likely the most rapidly growing economy in the European Union.

In contrast to the second quarter weakness, both quarter-on-quarter and year-on-year GDP growth was high in the third quarter, as operational indicators previously suggested. Namely, retail turnover in the third quarter grew by 2.0% (quarter-on-quarter), pointing to increased customer activity in recent months. The year-on-year retail turnover growth figure stood at +2.5%. As opposed to the situation in the second quarter, there was growth in industrial output in the third quarter of the year both in quarter-on-quarter (+1.6%) and, slightly, also in year-on-year (+0.2%) terms. It is noteworthy that the greatest positive contribution came from manufacturing (+2.4% quarter-on-quarter; +1.7% year-on-year).

Just like in the first half of the year, GDP growth in the third quarter was likely determined by rising private consumption, as a result of which services grew rapidly. The weak growth of the tradables seen in the second quarter, however, may to a great extent be related to one-off factors. Thus, for instance, the weak performance in manufacturing was mostly the result of the halted production at AS "Liepājas metalurgs". This effect was no longer as pronounced in the third quarter data, since a stop to the drop in the sub-sector output was observed already in August, while the output of other metal manufacturers (apart from AS "Liepājas metalurgs") even grew in September. The problems in the metals sub-sector still act as a drag on the overall year-on-year development of manufacturing.

Recovery in the construction sector continued in the third quarter, lead by the building of roads and infrastructure, realization of water works projects as well as the gradually resumed construction in the residential segment. The operational data of the transport sector still point to a fall in activity: the port and railroad turnover dropped also in the third quarter. In terms of the developments in the agriculture sector, this year's harvests are good compared to the average results of the last five years, yet they lag behind the record harvests of last year.

While still weak, the situation in Europe is gradually improving, as indicated by the confidence indicators compiled by the European Commission as well as the PMI (Purchasing Managers Index) readings in the recent months. In Russia, the leading indicators of the third quarter signalled weakness; however, the final quarter of the year started with comparatively better readings pointing to improved business conditions. If the real economy of the trading partners develops in line with the leading indicators, an increase in external demand can be expected that might have a further positive impact on the growth of our exports and our export-oriented manufacturers.

Please note that the flash estimate of GDP is based on the operational statistical information of individual sectors (industry, construction, trade as well as taxes on products). A more precise and detailed GDP reading will be published on December 9, 2013 which is when we will be able to better judge the factors determining GDP growth in the third quarter.