Is the Earth's rotation slowing down or does Latvia's economic growth lose momentum?
The global economic growth is gradually slowing down; therefore, people and businesses in Latvia were also expected to gradually become more cautious, and this would mean lower GDP growth.
The GDP growth rate has indeed moderated; however, consumption, investment and exports have remained relatively robust, thus highlighting the role of more significant temporary factors.
GDP growth decelerated (-0.1% quarter-on-quarter and only +3.2% year-on-year) due to the adverse effects of temporary domestic factors (e.g. the impact of weather conditions on agriculture and energy) and some individual factors supporting the GDP growth observed last year, thus reflecting a high base for comparison. For instance, in 2018 Latvia's transportation services were increasingly used for transit due to repairs taking place at the Ust-Luga Port in Russia, tourism and consumption were boosted by events dedicated to Latvia's centenary, while the activity of working forests and wood processing was augmenting on account of high prices of wood, thus strengthening new investment and, consequently, the expansion of industrial output and productivity growth. The impact of these factors will cease or gradually discontinue in 2019.
In the first quarter, the growth in private consumption has remained stable, albeit with the pace of increase decelerating somewhat. Apparently, the talks about global developments and a potential crisis have not made households think twice before spending their money. The rise in the average real net wage and the increase in the rate of employment have provided for income growth. Moreover, supply is also expanding: the number and space of Latvia's shopping centres are constantly increasing.
Of the components of domestic demand, it is investment that is facing the highest levels of uncertainty; therefore, forecasting investment already starts resembling fortune telling by reading coffee grounds. On the one hand, weakening external demand reduces investors' risk appetite, lending is weak and credit institutions are cautious; moreover, corporate profitability is expected to suffer and stable financing is only granted by the European Union (EU) funds. On the other hand, investment growth exceeded the most optimistic forecasts in 2018, and many sizeable investment projects that might even raise the problem of construction capacity have been launched and are still planned. Thus, these considerations are very contradictory. The data released by the Central Statistical Bureau of Latvia today suggest that in the first quarter, investment has increased by 10.5% quarter-on-quarter (seasonally and calendar adjusted data), and this is a very good rise, albeit lower than we were used to experience in 2018. The next quarter will show whether this points to a postponement or suspension of investment plans or it has just been a short moment of silence following the previously observed leap. Nevertheless, as to investment, the situation overall seems optimistic.
A moderation in external demand has adversely affected the performance of exports, and this has led to negative net exports already since the second quarter of 2018. However, the first quarter marks a turning point in this respect, with real exports of goods and services even growing better than could be expected, but imports decreasing somewhat. Thus, this time net exports follow a positive trend; however, their contribution is most likely to turn negative again. With the US–China trade tensions escalating and the deadline for the UK's exit from the EU extended, there is high uncertainty about the future growth. Therefore, Latvia's major trade partners are also expected to record slower economic growth. Nevertheless, the degree of capacity utilisation in the exporting sectors remains high, which explains why exports is on a more sustainable path; however, export growth is expected to moderate due to weakening external demand and other factors (lower profitability and availability of labour force), with this moderation being the main downward risk to GDP growth in 2019.