The construction sector gives momentum to economic growth in the second quarter

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In the second quarter of 2018, the pace of Latvia's economic growth lagged behind that observed at the beginning of the year. This is no surprise given the problems faced by the financial sector and a slowdown in euro area growth. Nevertheless, Latvia's economic growth remains strong and even slightly exceeds expectations, mostly on account of the performance of the construction sector.

According to the flash estimate of the Central Statistical Bureau, in the second quarter of 2018 GDP rose by 0.8% quarter-on-quarter (at constant prices, seasonally adjusted data). Annual growth rate stood at 4.2% in calendar adjusted terms and 5.1% in non-adjusted terms[1].

The construction sector continued on a strong upward trend in the second quarter . Supported in part by European Union (EU) funds and in part by private investment projects, the sector is increasing its role in the economy. The growing activity in the sector is also reflected in a more substantial rise in prices : construction costs increased by 4% year-on-year in the second quarter. The rise in costs has been driven by growth in labour remuneration for quite some time now. This is in line with the indicators published by the European Commission with respect to factors restricting business growth in the construction sector: businesses increasingly complain about labour shortages . In May and June, even more construction businesses reported labour shortages, rather than limited demand, as the major factor dampening further growth. Such development was previously observed only in 2005–2007. It should be noted, however, that the current labour shortage indicators are much lower than those seen during the economic boom when more than 50% of the construction businesses complained about labour shortages (as opposed to 22.6% according to the July data).
While retail trade growth remained quite strong (6%), manufacturing increased by a mere 2% year-on-year in the second quarter. The small and rather discouraging increase resulted not only from a subdued manufacturing performance but also from a weak quarterly performance of the energy sector. Owing to the negative impact of the drought, energy production declined by 7.4%, mostly due to a drop in energy generated by hydropower plants. The growth rate of the manufacturing sector decelerated on account of both the previously reached high base and the insufficient capacity on the supply side. According to the third-quarter survey, capacity utilisation in manufacturing has climbed to a new record-high level of 77.6%, and already 22.4% of manufacturers also complain about labour shortages (a new post-crisis record. Moreover, the external risks that intensified in the middle of the year, e.g. with respect to the threat of a trade war and the potential outcome of the Brexit negotiations, do not facilitate the stability necessary for good manufacturing performance in the long run.

Although data on the financial sector performance in the second quarter are not yet available, it has most likely continued to contribute negatively to the increase in gross value added. The fundamental changes in the sector will probably continue to affect economic growth in the coming quarters as well.

Issues on the supply side have become ever more pronounced in several sectors, e.g. construction and manufacturing. Along with more subdued developments in export markets and the heightening of external risks, these issues will dampen the overall GDP growth rate in future.

A more thorough assessment of the second quarter results will be possible on 31 August when more detailed data on the updated GDP and its changes are published.

[1] The second quarter of 2018 had two additional business days as compared to the respective quarter of the previous year, thus accounting for some growth rate differences. The same is also expected in the third quarter, just vice versa: there will be fewer business days than the year before due to the Song Festival and the Pope's visit.

APA: Zorgenfreija, L. (2019, 17. jul.). The construction sector gives momentum to economic growth in the second quarter. Taken from https://www.macroeconomics.lv/node/4194
MLA: Zorgenfreija, Līva. "The construction sector gives momentum to economic growth in the second quarter" www.macroeconomics.lv. Tīmeklis. 17.07.2019. <https://www.macroeconomics.lv/node/4194>.

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