Gross domestic product grows; growth to slow in the next quarters

  • Igors Kasjanovs
    Igors Kasjanovs
    economist, Latvijas Banka

The adjusted data of the Central Statistical Bureau indicate that gross domestic product (GDP) at constant prices has grown in the second quarter by 5.0% year-on-year (unadjusted data). It has also grown 1.3% quarter-on-quarter (seasonally adjusted data). Thus no substantial adjustments of data have been made to the GDP flash estimate published a month ago (the quarterly growth has been adjusted upward by 0.3 percentage points and annual growth downward by 0.1 percentage points), yet the data published today represent more extensive statistical information and breakdown by GDP components. Moreover, by Eurostat evaluation, the Latvian GDP growth remains the fastest in Europe. The GDP data of previous years have also been adjusted toady. The GDP growth for 2011 has not been reviewed but the GDP drop in 2010 has been increased from -0.3% to -0.9%.

The private consumption component in the second quarter of 2012 contributed most to GDP growth (annual growth at 7.2%; contribution to GDP growth at 4.9 percentage points). The private consumption component has lately been the most stable growing at approximately the same rate as the rest of GDP, which is logical, since private consumption is the largest GDP component. Private consumption keeps up with the very moderate growth in real wage bill. In all likelihood, the near future will see a continuation of this trend; an indication is also the question in the consumer confidence survey by the European Commission about the amounts of savings for the next 12 months. The population expects to save less, so most of their current income will be directed toward consumption. The overall consumer confidence in Latvia has remained stable this year, contrasting with most of Europe where it has deteriorated substantially.

The gross fixed capital formation or investment component should also be highlighted. It is precisely investment that at the moment provide for the persistence of Latvian economic growth against the unfavourable economic developments in Europe. In the second quarter of this year, the amount of investment has grown 20.5% year-on-year (contribution to GDP growth: 4.3 percentage points). The rapid growth in this component is hardly surprising ­– the data on construction (a major part of investment) indicated already earlier that a relatively high investment activity has resumed. That can be explained both by the high load of production capacity (72.0% in the second quarter of 2012, which the highest since the end of 2006) and by the administration cycle of European Union funds, i.e. this planning period is drawing to a close promoting more activity in mastering the EU funds and at the moment, several large investment projects are being carried out in the country. The annual rate of growth in the gross capital component (which, in addition to investment, includes also changes in stock levels) was only 1.0%, which was determined by a substantial drop in the stock levels. This, however, may be evaluated as a positive development: the lower the stock levels, the more rapid the trade.

In the second quarter, the goods and services real exports have grown 3.8% and imports 3.7%. The real growth in goods exports was at 4.1% and in services at 3.1%. The imports of goods meanwhile grew by 3.1% and services by 10.2%. Thus the rate of growth in exports has been higher than those in imports for a second consecutive quarter. Since the import component in GDP is greater, however, its negative contribution exceeded the positive one from export and the external balance made an overall negative contribution to GDP, 0.3 percentage points, in terms of annual growth.

Regarding GDP from the production side, in most economically important branches both the quarterly and annual rates of growth have been substantially positive. Thus in manufacturing, the value added in the second quarter grew 9.0% year-on-year, in construction 23.5%, and in trade 6.1%. In the transportation branch the annual rate of growth likewise remained high at 7.5%. Negative rates of growth were meanwhile observed in the branch of financial and insurance activity (-2.6%), in operations with real estate (-4.9%), in public administration and defence (-1.7%), as well as human health and social work activities (-2.4%).

The Latvian GDP growth has lately been positive and stable. It can be expected that in the third quarter of this year the quarter-on-quarter growth will drop slightly while remaining positive in contrast to some other European countries. The first operational data on the third quarter of this year (industrial production volumes, retail trade turnover, tax revenue, confidence indicators) point to the third quarter beginning at least at the level of the previous one or even slightly higher. The European Central Bank yesterday announced new measures in fighting the European debt crisis, by resolving to purchase, in unlimited amounts the short term (up to 3 years) debt securities of the problem countries. The financial markets are sure to have a positive reaction to this measure, yet it will not have any effect on the fundamental growth factors of the real economy. On the other hand, this is another measure that gives the problem countries time to administer reforms and cut their budgets, which in turn will have an effect on the foundation of future economic growth. The annual growth rate will go down starting with the third quarter, mainly because of base effect.

In the second half of the year Latvia will face continued growth dampening risks. Much has been written and said about the crisis in the European economy and the unpredictable developments in this area. Even though Latvian producers and exporters are successfully continuing to diversify the portfolios of their products and orders, it must be kept in mind that it is not only Europe that faces economic problems. Growth in the Chinese economy is gradually slowing down, the US economy is reaching its regular debt burden “barrier” and the growing prices of oil, food and other raw materials represent a threat to the growth opportunities of the industrial countries.  

Domestically, the most important event in the second half of the year will be the drafting and adopting the next state budget – a process wrought with challenges, particularly in view of the coming local government elections. It should also be borne in mind that because of the European crisis, there are substantially more negative scenarios than positive ones. We must continue with the structural reforms in education, health, energy and business environment that will provide for economic growth in the medium and longer term.

The Latvian economy is moving along the right path: we are growing despite the problems in the European and global economy. This is evidenced by eleven consecutive quarters of growth resulting from economic policy decisions which apparently have been the correct ones. Now we must continue to work on reforms that would provide for stable growth in the future as well.

APA: Kasjanovs, I. (2024, 23. apr.). Gross domestic product grows; growth to slow in the next quarters . Taken from https://www.macroeconomics.lv/node/2191
MLA: Kasjanovs, Igors. "Gross domestic product grows; growth to slow in the next quarters " www.macroeconomics.lv. Tīmeklis. 23.04.2024. <https://www.macroeconomics.lv/node/2191>.

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