Despite some faltering, GDP is expected to improve in summer

Specialized transport for the construcion works in winter, illustrative picture
Photo by: Shutterstock

In the first quarter of 2021, the national pandemic containment measures and the high uncertainty limiting consumption and investment continued to weigh on GDP growth. GDP declined by 1.7% compared to the fourth quarter of 2020 (seasonally adjusted data). To some extent, the performance was also affected by seasonal weather conditions. This year, there were heavy snowfalls that had a negative effect on activity in the construction, logging and other sectors, and, on the demand side, had a slowing effect on the implementation of investment projects. Nevertheless, the government support measures helped stabilise the situation.

Briefly on the GDP expenditure components:

  • Investment activity was already weak last year. At the beginning of 2021, the situation worsened on account of the overall uncertainty, the heavy snowfalls which hindered construction works and the growing prices of building materials. While private investment can be substituted by the government support instruments intended for investment projects, inter alia infrastructure investment projects, all outdoor construction works were adversely affected by the weather conditions.
Construction work during the winter
Construction works at Rail Baltica Central junction in February this year
EDZL press photo
  • Restrictions also continued to weigh on private consumption. This was primarily due to forced accumulation of savings as the level of income remained relatively stable. Moreover, during this time income was also supplemented via the government support measures, including one-off payments to families with children, pensioners and persons with disabilities.
  • As to exports, the overall situation in the first half of the quarter was similar to that observed at the end of last year. Significant contributions of exports of wood un agricultural products ensured an overall solid performance, with exports of goods even reaching new record-highs. Meanwhile, exports of services remained weak.
  • Turning to imports, here too, the situation was similar to the previously observed: the developments in goods differed from those in services, e. the segment of goods continued to be a major contributor, while the services sector was affected more negatively.

Compared to the fourth quarter of 2020, declines were observed in several goods and services sectors. Although the development of the services sector overall was still hindered by the restrictions introduced and maintained to contain Covid-19, for some sectors, such as retail trade and beauty treatment services, the restrictions were gradually eased over the quarter, enabling service providers to resume the face-to-face services.

Health-care services recorded further growth, and the value added in the ICT services sector and the financial sector increased. The performance of the goods-producing sectors was significantly influenced by declines in construction and agriculture. In this context, we should note both the high value added recorded in the previous quarter and the above weather conditions.

The fall in GDP as compared to the first quarter of 2020 can be largely explained by the performance of the sectors affected by the distancing requirements and gathering restrictions, with the tourism, recreation and entertainment sectors being the largest negative contributors.

With easing of restrictions and higher spending, in summer GDP is expected to recover at an increasingly faster rate. In April and May, consumer and business sentiments improved significantly, and restrictions were also lifted gradually. However, the developments in autumn remain difficult to predict as they will significantly hinge on the pace of vaccination, the effectiveness of vaccines as well as the viability of the virus.

APA: Rutkovska, A. (2022, 14. aug.). Despite some faltering, GDP is expected to improve in summer. Taken from https://www.macroeconomics.lv/node/5229
MLA: Rutkovska, Agnese. "Despite some faltering, GDP is expected to improve in summer" www.macroeconomics.lv. Tīmeklis. 14.08.2022. <https://www.macroeconomics.lv/node/5229>.
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