Despite risks, economic growth continues

Despite risks, economic growth continues
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The flash estimate for Latvia's economic growth in the third quarter shows that after the unfavourable developments at the beginning of the year growth has recovered and stabilised; however, it was primarily driven by short-term factors such as a renewed rise in energy production from a low level and a good grain harvest. According to the flash estimate of the Central Statistical Bureau (CSB), in the third quarter of 2019 GDP grew by 0.7% and 1.8% quarter-on-quarter and year-on-year respectively (adjusted data).

Growth was in part supported by an improvement in temporary factors. The monthly data suggest that the electricity production has recorded a relatively rapid rise from a low level, as reflected in the overall growth of industrial production. At the same time, the agricultural sector saw a good grain harvest favourably affecting the development of the wholesale trade and transport sectors. In the near future, the transport and storage sectors are likely to benefit from the investment made and planned in the air transport sector as well as from the emerging logistics centres. It should be noted, however, that the external factors remain unfavourable for the expansion of the transport sector.

In September, the annual growth rate of retail trade turnover slipped into negative territory for the first time since November 2015. By commodity group, over the past few months the retail trade development has gradually moderated in businesses primarily trading in goods intended for housing repair and improvement. This could point to cautious spending behaviour on the part of households. 

The latest survey suggests that only the consumer sentiment has remained unchanged. Meanwhile, according to the European Commission data published in October, Latvia's sentiment indicators overall do not inspire optimism. The latest sentiment surveys suggest that the share of businesses indicating labour shortages as a significant factor dampening growth in the construction, manufacturing and trade sectors has declined. Data on the changes in the average wage in the economy were not yet available in the third quarter; however, for instance, when considering construction cost components, the annual rate of change declined most notably for labour remuneration. While these developments point to easing tensions on the labour market, the annual rate of income growth has most likely remained relatively high. Furthermore, an increase in savings was observed earlier. Thus, labour market developments are not expected to notably affect the consumption dynamics in the near future.

Since the beginning of the year, capacity utilisation in manufacturing has declined further; nonetheless, despite the more modest global growth forecasts published by international institutions, export expectations of businesses for the coming months have not deteriorated. In October, the International Monetary Fund revised downwards its global growth forecast for 2019 and 2020, including that for the euro area. Furthermore, the UK has once again postponed leaving the EU, thereby extending the uncertainty about the future economic relations with this country. However, this might leave room for some temporary stock building. 

The monthly statistics suggest that, with the weakening of external demand, manufacturing growth has also decelerated in Latvia. Moreover, the development of manufacturing is particularly hampered by a fall in the wood industry, which is affected by external demand, though not as much as by several other unfavourable factors, including the damage caused by the wind and insects in Europe, resulting in increased logging and lower prices. However, the impact of these factors is likely to ease in the coming quarters.

More comprehensive information on the sectoral development and the dynamics of GDP expenditure components will be available in a month. The currently available CSB data suggest that the GDP level has changed quite significantly since 2017 as a result of a benchmark revision.

APA: Paula, D. (2022, 28. may.). Despite risks, economic growth continues. Taken from https://www.macroeconomics.lv/node/4644
MLA: Paula, Daina. "Despite risks, economic growth continues" www.macroeconomics.lv. Tīmeklis. 28.05.2022. <https://www.macroeconomics.lv/node/4644>.

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