The element of surprise has vanished, but growth is still present
Emotions of surprise stirred by the release of the flash estimate of gross domestic product growth in the third quarter of 2018 have already subsided, but the detailed third quarter data published by the Central Statistical Bureau confirm that Latvia's economy has experienced rapid growth. At the same time, however, the question concerning the sustainability of the factors underpinning this growth remains relevant.
It is mainly the services sectors that have bolstered the quarterly growth of 1.7% (in seasonally and working-day adjusted terms), i.e. the ICT sector continues on a stable upward path, the transportation and storage sector demonstrates a substantial improvement, as expected according to the short-term data. Meanwhile, the financial sector, whose dynamics during the first half of the year were in accord with the saying "jumping from one ditch into another", is balancing close to the edge of bust or boom, and it is difficult to forecast the sector's future development. The real estate sector's quarterly performance was also volatile, with the third quarter posting strong growth.
The hurricane-force-like construction development experienced at the beginning of the year has made it possible for the construction sector to achieve a high level of value added, and the activity seen in the third quarter looks unimpressive against this background, i.e. the above quarter witnessed a contraction of 0.4% despite the high annual growth rate (14.2%). The agricultural sector suffered from the weather conditions prevailing in the third quarter. Nevertheless, its annual growth rate remains as rapid as that of the overall economy (5.3% in seasonally adjusted terms).
Development of the trade sector is weakening irrespective of capacity increase in retail trade and new trading venues being opened, and it is also partly affected by export indicators, which are not as brilliant as one would like them to be.
With uncertainty in the external economic environment growing and export opportunities becoming increasingly unclear, it is possible to re-enter a situation where private consumption becomes a driver of the economy. Although private consumption is currently continuing on a stable upward path, its contribution to economic growth gives in to that of investment. Development based on private consumption would not be sustainable in the case of Latvia, since domestic private consumption alone would not be sufficient for a small economy to ensure growth in the long run. The quite impressive rise in the average wage in the economy, as suggested by the third quarter data, has already somewhat slowed down. Meanwhile, the European Commission's data show that consumer sentiment slightly decreased over the past months, including November, mainly due to more pessimistic expectations with regard to household financial position and the overall economic situation in the country. At the same time, according to the people surveyed, unemployment will shrink.
A pick-up in investment activity currently looks encouraging, i.e. gross fixed capital formation, which had climbed at a slower pace in the second quarter, increased by 4.2% during the third quarter. However, the lengthy government formation process as well as the uncertainty surrounding priorities of the future government and its policy concerning development of specific sectors may lead to deterioration of business sentiment indicators and emergence of a situation unfavourable for making investment decisions in a number of sectors. Under such circumstances, buoyant economic growth almost seems to smack of winnings from the lottery by happy coincidence. Against the background of development experienced this year, there is no reasonable prospect of as rapid investment growth next year when the overall economic growth will also slow down.