Gross domestic product growth no cause for undue optimism

According to the operational data of the Central Statistical Bureau (CSP), gross domestic product (GDP) grew by 0.2% (seasonally adjusted data) in the first quarter of this year, which is a lower rate of growth than in the previous quarters. The annual growth, by seasonally unadjusted data, reached 3.4%. 

That fast growth is not expected in the first quarter of this year was already obvious by analysing several operational sector indicators. Thus manufacturing output dropped 3.1% (seasonally adjusted data) and retail turnover 1.6% (although, with automobile sales, which are not included in the trade statistics, a 0.7% growth was registered) quarter-on-quarter. In mining the first quarter saw a very substantial drop of 22.4%, explained by the weather conditions last winter. The drop in the output of the mining sector, however, is compensated by the increase in the output of electrical power and gas supply sector by 5.6%, also explained by the cold weather. 

Although growth was slower than before, the economic sentiment indicator compiled by the European Commission improved by 1.2 points over the first quarter, signalling that the slower output growth is probably indicative of short-term fluctuations in economic activity. Confidence in industry improved by 1.9 points, consumer confidence by 1.1 points, confidence in retail trade by 3.6 points and in construction by 12.3. A slight drop in confidence, 0.3 points, was observed only in services. A negative signal, however, is the April confidence indicators that worsened in almost all components. Such developments indicate an unsteady recovery of the economy, which makes us maintain caution and not give in to too much optimism. 

Future GDP dynamics will depend on conflicting factors. On the one hand, the regained competitiveness during the crisis stimulates economic recovery: that is seen by the rapid growth of exports, which is gradually encouraging domestic demand. The rapidly rising prices of food and energy resources in the world commodity markets as well as the domestic decisions to raise taxes impede a faster economic growth. As uncertainty persists regarding further decisions in the area of budget consolidation and structural reforms in Latvia and the financial situation in several European countries remains unstable and there are other geopolitical tensions, uncertainty regarding future development is on the rise, impeding enterprise investments. 

The construction sector whose value added in constant prices in 2010 was only about one half of construction value added in 2008 and enterprise investment activity will continue to play a important role in the overall growth of gross domestic product. Representatives of the construction sector acknowledge that activity has gradually resumed in some segments, but it is still very unsteady. It is the construction confidence indicators that have registered the fastest growth in recent months, with employment expectations in the industry particularly on the rise. 

Please observe that the GDP data published today are to be considered a "flash estimate", obtained by CSP, by processing the partially compiled information on the first quarter using mathematical models. A more precise and detailed GDP assessment will be published on 9 June 2011.