Gross domestic product grows for a fifth consecutive quarter, prospects to be determined also by global developments

In the fourth quarter of 2010, gross domestic product (GDP) grew by 3.7% year-on-year, according to the flash estimate, by the Central Statistical Bureau (CSB). The quarter-on-quarter growth was 1.1% (excluding the seasonal effect).

We must caution yet again: the flash estimate is based on the currently available operational data and information generated by mathematical models whereas detailed and expanded statistics on the fourth quarter will be published by the CSB on 11 March. Only then we will be able to better evaluate the growth determining factors at the end of last year and in 2010 overall. 

Today's estimate indicates that in 2010 overall GDP may have shrunk by 0.2% in constant prices. It is of course shrinkage, yet it is substantially smaller than predicted by market participants at the beginning of the year: GDP quarterly growth has continued throughout 2010 and the overall rate of growth has remained negative only because of the base effect.

Operational statistics confirmed that the economy continued growing in the fourth quarter. According to seasonally adjusted data, manufacturing grew by 0.3% and electrical power and gas supply increased by 1.8% quarter-on-quarter.  The rate of growth in manufacturing thus slowed and in the second half of the year it started fluctuating more than before.

The retail trade turnover (including automobile sales) in the fourth quarter of 2010 grew by 2.2% quarter-on-quarter (it must be said that it is precisely automobile sales that is the greatest contributor to growth). Owing to a notable increase in cargo turnover at the Riga free port, in the fourth quarter overall the ports had a 4.9% increase (seasonally adjusted data, BoL estimate) in cargo turnover. The turnover of cargoes shipped by rail likewise increased. At the „Rīga” airport, on the other hand, a drop in customers served was observed on account of weather related complications.

The confidence indicators collected by the European Commission  (EC) improved by 1.1 points in industry and consumers, by 8.1 points in the service sector and 5.4 in construction, but deteriorated by 0.7 points in retail trade. In January, the economic sentiment index deteriorated after a growth spanning almost one and a half years because of a more negative economic outlook by industrialists and service providers.

At the beginning of 2011 economic growth will depend on several domestic and external factors.

First of all, Latvia's economic recovery will depend on developments in the world at large – at the moment, there are several external risks that may have a negative effect. In the global raw material exchanges, the prices of food are going up and so are the prices of oil because of the Egyptian crisis, which will have an effect on the fuel prices in Latvia as well. Some of Latvia's foreign trade partners are busy consolidating their budgets, which may have an effect on their economic growth and, as a result, diminish the demand for Latvian industrial production.

As far as the domestic developments, the Latvian economy has started another year with a consolidated budget where the measures taken have included an increase in tax rates. That will slow the overall economic development, especially if taxes are expected to be raised in the future as well. The increased tax rates as well as the raised prices of food and energy leave households with diminished financial means and it is therefore possible that a further recovery of private consumption will be uneven and will not be fast.

Fig. 1. The seasonally adjusted GDP growth rates, % quarter-on-quarter

* CSP flash estimate