Covid-19 was not the only factor affecting the economy's performance in the first quarter

Moreover, it should be noted that the temperature in certain sectors, e.g. the transport services sector, was low even before the onset of the Covid-19 crisis in Latvia. However, the impact of the constrained economic activity in March is likely to be reflected already in the GDP estimate for the first quarter. According to the GDP flash estimate of the Central Statistical Bureau (CSB), in the first quarter of 2020 GDP shrank by 2.9% and 1.5% quarter-on-quarter and year-on-year respectively (adjusted data).

Although the first quarter data by sector and expenditure components will only be available in a month, the short-term data already show divergent trends. For instance, in January and February the retail trade and export results were quite optimistic, but in March the retail trade indicators deteriorated sharply, although the decline was largely offset by trade in basic goods.

Meanwhile, the transport sector saw unfavourable developments already before Covid-19, recording lower freight volumes both at ports and in railway. Currently, the sector is facing new challenges: international travel is suspended due to the lockdown, and the freight transport is experiencing difficulties caused by supply chain disruptions and issues with logistics. Furthermore, manufacturing, which has experienced declines in external and domestic demand already since 2019, is also affected by Covid-19 via more expensive supplies, delayed deliveries, idle commissioning businesses and intermediate goods' producers as well as declining demand.

The first quarter actual data might show no dramatic changes in private consumption yet, with the restrictions put in place towards the end of the quarter, the employment declining only gradually and households having an opportunity to spend their savings. Meanwhile, the impact of consumption suspended due to cancelled events and movement restrictions and the caution in spending due to deteriorating economic sentiment and declining income will be reflected more clearly in the second quarter data. Exports of services are likely to record relatively more negative developments already in the first quarter (in the areas directly affected by movement restrictions),. Meanwhile, the effects of postponed investment decisions will manifest themselves with a slight lag as the projects in progress were largely continued.

Whether the GDP decline seen during the fight against Covid-19 will be followed by rapid growth depends on the global nature of the pandemic, the exit strategy from the state of emergency as well as the ability of the society to adjust. The purpose of the government support measures is to ensure that the economy recovers as soon as possible. However, we are not isolated. Even if the spread of the virus was quickly and successfully contained in Latvia, many businesses would still rely on the external demand and the lifting of international travel restrictions. It should also be noted that, after loosening the restrictions, it will take some time for the domestic idle businesses to restart operating and for the closed businesses to be replaced by new ones.