End of 2015 was marked by slowing growth
According to the data published by the Central Statistical Bureau, the Latvian economy slowed perceptibly in the fourth quarter of 2015, reflecting the high uncertainty and risks created by external factors. Seasonally adjusted gross domestic product (GDP) at constant prices, fell by 0.3%, quarter-on-quarter, with the GDP annual growth rate dropping to 2.3% in the fourth quarter.
According to seasonally adjusted data, in 2015, the Latvian GDP increased by a mere 2.6%. It is worth noting that the updated GDP figure in the fourth quarter of 2015 was lower than the flash estimate published at the end of January.
In 2015, growth was primarily determined by private consumption (that showed growth also in the fourth quarter), which, for the entire year was underpinned by the relatively fast rise in real net compensation. It is expected that private consumption will continue to determine growth in 2016, as the purchasing power of employees continues to grow and consumer future assessment of their financial situation remains stable.
In the area of investment and export, the situation is not clear cut. In the fourth quarter of 2015, a drop in investments and exports was observed. Already earlier, the less than happy news on the fourth quarter performance of the construction sector pointed to a relatively low amount of investment. The drop in investment at the end of 2015 was also reflected in the low amount of capital goods imports as well as a drop in overall amount of imports.
Even though the amount of investment grew in 2015, the lack of clarity regarding future development and risks in the external environment are impeding a faster recovery of investments. Therefore investment activity is expected to be only moderate in 2016. As evidenced by enterprise surveys, investments to a large degree still depend on the availability of European Union (EU) funds. The transition to the new planning period of EU funding is not taking place as smoothly as was hoped mainly due to the slow development of the regulations of the Cabinet of Ministers, which in turn gives rise to increased worries for a possible breach in EU funding.
The fourth quarter was not too successful for exports (a drop in real terms if compared with the fourth quarter of 2014), yet in 2015 overall, the export amounts increased slightly despite the weak external demand and tense geopolitical situation.
Export development in 2016 is expected to present a number of challenges. Even though the European Commission predicts a faster year-on-year growth to some of our main trading partners , there is still a high degree of uncertainty in the global economy (for example, the deterioration of the situation in Brazil and China). Thus we should not rely only on a rise in external demand. Investment in raising competitiveness and acquiring new markets is still the main way forward to increase the export amounts.
In 2015 overall, growth was based on a strong private consumption, which, to a certain degree masked the weak external demand and lack of stability in investment. The year 2016 promises to be similar, yet in the longer term, consumption alone will not be able to heat the economy. The external factors currently do not foster either export or investment growth, therefore measures to reorganize the Latvian business environment and other areas, by implementing the necessary structural reforms becomes even more important. Hopefully revision of the taxation policies and the effectiveness of the state budget expenditure will ensure not only a balanced budget but also make the business environment more competitive.