At the end of the year, GDP growth has sped up

Already observing the operational data, it was clear that an acceleration in the GDP growth will be observed by the end of the year. Very good manufacturing results pointed to this both in October and November. Retail trade results in November – in contrast to its customary flagging of late – were also very good (December data slightly counterbalanced them). Additional warmth for GDP growth in the direct and indirect sense were provided by the November and December records in the energy sector.

The great unknown regarding GDP data was the development of the construction branch.  However, judging by the CSB information, the construction drop has slowed down. In construction overall, 2016 was a year of crisis, yet the moment when EU structural fund financing will gradually flow into the branch, which should return it to the land of the living, is right around the corner.  At least now, however, it is not clear when exactly it will happen. Within the past year, the normative basis has been put in order, i.e. programmes are beginning to function, yet some time will be taken up by procurement procedures and various agreements.

The construction industry representatives also are of the opinion that the actual construction work will begin in the second half of 2017 or even in  2018. Moreover, there is still talk in the industry that, as the demand for construction services increases, there may be a lack of labour force, for some of the workers have moved to other industries or abroad in this year of downtime.  

Some of the construction enterprises in 2016 have moved their activities to the export markets, which is evidenced by new records in the export of Latvian construction services. The information included in the CSB press release to the effect that in the fourth quarter of  2016 the added value of service branches increased by a mere 1% year-on-year suggests that in some of the service branches results may be relatively bad. The operational statistics of the transport industry gradually improved in the fourth quarter and thus negative surprises are likely to lurk in the financial services or real estate branch.

Even though construction industry has been the focus of economic analysts, it should be kept in mind that it is not the only branch to account for GDP dynamic. It is impacted to a great extent also by successes or failures of manufacturing, trade and some service branches.

At the beginning of 2017, some good signals in the external environment have been observed – leading indicators point to a possibility that in Latvia's external trade partners growth could be even slightly faster than forecast earlier. Yet at the same time a number of negative risks remain, mostly related to the political environment – both to the change in US policies and the expected elections in a number of EU countries. If there is no new turbulence in the external environment, then the Latvian economy should grow by about 3% in 2017. That would be determined by the stable rise in private consumption, acceleration in the rise in public consumption (including the EU fund financing), as well as a gradual recovery of investment activity.

The second estimate of GDP that will provide information on the activity of some branches and the spending side components will be published on 28 February.