The economy is growing, while the road ahead looks somewhat bumpy

The economic growth rate seen in the first quarter of 2018 gives the impression that "the caravan carries on". However, drivers of growth could not be exactly regarded as ones maintaining the momentum. It is expected that growth in 2018 overall will be slightly slower than last year. It will be affected by both the high rates achieved in several areas in 2017 and the factors observed during the first months of this year. The above factors, along the same lines as shown in the old fable about the swan, crayfish and pike, make it impossible to pull the loaded cart in the desired direction with sufficient vigour. They are, for instance, the international trade policy and problems faced by the financial sector. Thus, the figure published by the Central Statistical Bureau, i.e. 1.6%, could be the fastest quarter-on-quarter gross domestic product (GDP) growth witnessed this year.

The global growth rate has remained high over the past few months, and its estimates have even been improved, making development of external demand still look favourable for Latvia's exports. However, changes in the international trade policy, e.g. in the form of tariffs and sanctions, as well as uncertainties in the geopolitical environment make the estimates of export future development more cautious. On the services side, problems faced by the financial sector have an adverse effect on export development. In addition to the lack of investment in machinery and equipment (mentioned in the commentary of the previous quarter) that has led to constrained productivity growth over a number of years, these factors preclude faster growth of export income and GDP as a whole. The first months of this year have already seen a relatively bumpy ride of export development.

Investment was a vital driver of growth in the first quarter, which is not surprising in view of the data reflecting the construction sector development during the first months of the year. Both the previously planned infrastructure projects (whose development has been facilitated by the absorption of European Union funds) and a number of large-scale private sector projects, e.g. in the trade sector, are implemented as envisaged.

On the expenditure side, private consumption retains its role of a significant GDP growth driver. An income increase is high, and the latest consumer sentiment indicators are more optimistic than they were a few months ago. Although the exacerbation of problems faced by the financial sector could deteriorate sentiment, the situation has been likely counter-balanced by labour market conditions generally favourable for employees. However, the consumption side might witness a little cautiousness temporarily, most probably in the second half of the year.

On the sectoral side, the construction and real estate sectors provided the biggest positive contribution to growth in the first quarter. As expected, the contribution of the financial sector was negative in the first quarter. Somewhat lower performance of manufacturing was offset by other industrial sectors. The heating sub-sector saw a sharp rise in the volume of production caused by the cold weather conditions, and the construction sector's development helped to increase quarrying output. Preliminary data of the transport sector already showed that development had deteriorated in comparison with the previous year since, despite the increasing number of passengers at the airport, the cargo volume at ports and that transported by rail as well as the overall exports of transportation services had edged down. Therefore, the value added of the sector stagnated at the beginning of the year.

Although the pace of Latvia's economic growth remains considerable, investment needs and reforms aimed at the creation of a more attractive business environment, which would enhance labour productivity growth, are overall still valid today, as has been the case up to now.