Supported by industry and export growth, GDP continues to rise

According to the flash estimate published to today by the Central Statistical Agency (CSP), gross domestic product (GDP) in the second quarter has grown 0.1% in accordance with seasonally adjusted data. Year-on-year, GDP has shrunk 3.0%, which is a substantial improvement compared to the first quarter of this year (-6.0%).
(Seasonally adjusted data mean that seasonal fluctuations in the data timeline are eliminated in the econometric calculations. That is done to be able to objectively assess the seasonal or monthly rate of growth, excluding from them the effects produced by seasonality. According to seasonally unadjusted data, GDP in the second quarter has grown 13.4%, but this number cannot really be taken into account because the Latvian economy has a tendency to record growth in the second quarter over the first. After adjusting seasonally the GDP second quarter growth over the first is 0.1%.)

In the second quarter, the Latvian industrial production continued to regain its competitiveness in the foreign markets, as evidence by the growth in the processing industry and a rise in goods exports. There were other signs as well that pointed to a stabilization of the economy: the future forecasts of the participants in the economy improved (the economic sentiment index measured by the European Commission improved all quarter long and so did the mood of individual respondent groups), the number of newly registered cars grew, the first sign of stabilization appeared in retail trade. The dynamic of the state budget revenue was also positive in the second quarter, which points not only to a stabilization of the economy but also to a renewed confidence of the market participants in the state sector.

Should such trends continue, the yearly GDP changes could become positive in the third or, at the latest, fourth quarter, i.e. an annual growth could be registered in the Latvian economy. After a drop, two consecutive quarters of growth have been recorded, and normally in such circumstances, economists tend to talk about an end to an economic recession. Several factors are still at play, however, which make us expect an uneven development and remain cautious regarding GDP forecasts for the subsequent quarters. The near future developments and risks most important for the Latvian economy are the imminent parliament elections, the adoption of the 2011 state budget and the related undertakings as well as a possibly weaker growth of the European economy at the end of the year and in  2011.

We should likewise bear in mind the experience of our neighbouring countries, i.e. that in these unstable conditions GDP growth in one or two quarters in itself is no guarantee that the growth will continue in the subsequent quarters. Thus the Lithuanian economy, after a positive growth in the third and fourth quarters of 2009, experienced a substantial GDP drop in the first quarter of 2010. Likewise the Estonian economy after a growth in the last quarter of 2009 underwent a drop in production.

In economic growth, a great role is played by the expectations of the participants (households, entrepreneurs, government) i.e. by their system of views regarding what may happen with the economy in the future. Even though progress has been made in the stabilization of the economy, Latvia still has to confront several problems. The parliament elections are of particular importance: they will affect the view households, entrepreneurs, industrialists as well as investors and international partners take on the future of the Latvian economy. A timely adoption of the 2011 budget and consolidation based on reduced spending and supported by structural reforms is an important precondition for securing confidence as well as continued, and moreover sustainable in the long term, economic growth.

A word of caution: the CSP data published today are provisional: they are based on the available short-term data and econometric calculations. An evaluation of the second quarter GDP based on a much more complete statistical information CSP will publish on 8 September of this year.