Domestic demand remains the only pillar supporting GDP growth

Domestic demand remains the only pillar supporting GDP growth
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Signals of decelerating export growth are becoming increasingly stronger, and GDP growth is mostly sustained by domestic demand. Without the support of exports, however, domestic demand alone cannot ensure sustainable growth. Hence, the growth rate is moderating gradually. Despite a slight loss of growth momentum, private consumption remains relatively resilient and is currently the most stable component of the domestic demand. Meanwhile, the growth rate of investment declined more notably: last year, it was still measured in two-digit figures, whereas currently it is only slightly stronger than the consumption growth. 

While exports were still able to withstand the external demand headwinds in the first quarter, their growth momentum is declining gradually. This is also reflected in the dynamics of manufacturing, the main export-producing sector, with the output of the wood processing sector shrinking due to several factors, one of the main being the weakening foreign demand (that from the Scandinavian countries in particular). The UK's desire to stockpile in anticipation of Brexit has peaked and is starting to decrease, thus also reflecting negatively on the demand for the products of the wood industry. Previously, metalworking and high technology sectors still helped to achieve relatively high growth rates. In June, however, the high technology sectors (manufacture of computer, electronic and electric products and other machinery) also saw steep declines in their growth rates. For the time being, though, the assessment of export orders does not show a contraction in the high technology sectors; hence, the moderation is more related to the previously-reached high base rather than the weakening demand. Meanwhile, the second manufacturing subsector supporting the manufacturing growth in the first half of the year was the manufacture of fabricated metal products. The assessment of its export orders has improved significantly this year, and the outlook for its future development also remains optimistic. This will at least partially offset the contraction in the wood industry output.

At the same time, in the first half of 2019 overall the services sectors (with the exception of the financial sector providing services to non-residents) maintained solid growth, consistent with the relative stability of domestic demand. This includes trade supported by both an increase in household income and the opening of new trading venues, inter alia, the opening of "Akropole" shopping and entertainment centre in the second quarter.

Overall, against the backdrop of weaker economic growth in the first quarter, the results of the second quarter seem even optimistic: GDP grew by 0.7% and 2.9% quarter-on-quarter and year-on-year respectively (seasonally and working-day adjusted data). However, we cannot assume a significant improvement yet since the first quarter saw poorer results due to some short-term factors, inter alia, the weather conditions causing a notable decline in the energy sector. This factor had an insignificant negative effect also in the second quarter. Meanwhile, in the second half of the year the figures may be more on the sunny side or, in the context of the energy sector, the rainy and snowy side. However, this improvement will do little to offset the weakening of the external demand, and overall the GDP growth rates are expected to moderate as compared to the relatively good performance of the previous years (2.9% in 2019 versus 5.0% in 2017 and 2018). Moreover, the forecast risks are skewed to the downside.

APA: Rutkovska, A. (2022, 28. may.). Domestic demand remains the only pillar supporting GDP growth. Taken from https://www.macroeconomics.lv/node/4557
MLA: Rutkovska, Agnese. "Domestic demand remains the only pillar supporting GDP growth" www.macroeconomics.lv. Tīmeklis. 28.05.2022. <https://www.macroeconomics.lv/node/4557>.

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