GDP posts moderate growth

According to the flash estimate by the Central Statistical Bureau, gross domestic product (GDP) in the third quarter of 2015 grew by 0.4% quarter-on-quarter (seasonal effects excluded). Year-on-year, GDP grew by 2.5%.

The available operational information had already indicated that GDP growth might have slowed in the third quarter. The main signal was the third quarter manufacturing results (currently, only those of the first two months are known), which, after the fast growth in the first and second quarters, slowed down a little in the third quarter. The operational data of the transportation sector (cargoes handled at ports) in the third quarter are weak. The data on the construction sector are yet to become available, but a certain amount of stagnation is observed, which is borne out by the drop in the sentiment indicators aggregated by the European Commission.

At the same time, the factors that have fostered GDP growth should not go unnoticed. Traditionally for this year, retail trade posted good performance in the third quarter (4.7% annual growth). It will be interesting to see in the full GDP data that will be published in a month whether the recently very uneven wholesale trade has managed to keep up with the success of retail trade or it reflects the weakness demonstrated by external trade (to a greater degree than retail trade, wholesale trade is related to export). Another positive surprise was the third quarter performance of the energy sector. The combination of factors: low gas prices, high demand in the Latvia-Lithuania electrical power trading area and limited transmission in the interconnections gave rise to generation of electrical power that was untypically high for the season (30.1% more year-on-year).

Economic growth will likely continue to depend on private consumption. With external demand becoming stronger in the medium term, exports will rise, yet their contribution to GDP growth will be in part offset by the rise in imports. The improvements in the labour market (albeit not as fast as before) will continue to foster the growth of households' disposable income, thus stimulating consumption. Such an economic model, however, can only provide the kind of growth we have been living with in the last couple of years, i.e. 2-3%.

To achieve faster growth, one or more of the factors listed below would have to come to pass:

(i) resumption of active mortgage lending that could revive the real estate market and later also the relevant construction segment;

(ii) faster external demand growth – stable euro area growth has to resume; geopolitical risks have to diminish etc.;

(iii) improvement in the confidence of households and/or entrepreneurs regarding the economic situation today and tomorrow. That would reduce the tendency of households and businesses to accrue finances and increase entrepreneurs' appetite for risk in making new investments.

The full GDP data that will provide for a more precise evaluation of growth factors will become available on 30 November. It also bears noting that on 26 October of this year the Central Statistical Bureau finished the annual revision of GDP data, which resulted in changes in the historical data of national accounts.