The engine for economic growth switches from export to consumption

The adjusted indicator of the Central Statistical Bureau points to faster economic growth than previously estimated. Gross domestic product (GDP) in the first quarter of 2013 has grown 1.4% quarter-on-quarter (adjusted upward by 0.2 percentage points).

As for the annual growth rate, a more detailed expose is this time in order, because one analyst will point out that growth has slowed down whereas another will claim that growth rate remains at the previous level and both will formally be right. Year-on-year, GDP has grown 6.0% according to seasonally adjusted data, whereas the growth has been only 3.6% in seasonally non-adjusted terms (true, the majority of European countries would be envious even of this indicator). Thus the drop in the annual growth rate from the 5.1% at the end of last year has in part be determined by the fact that in the first quarter of this year we produced and consumed for three days less: one full day (2012 was a leap year) , and two partially (Easter holidays this year fell in March, i.e. in the first quarter, yet here the impact is limited since life does not come to a complete halt during holidays).

The majority of operational data, however, support an objective slowing down of monthly growth. Industrial performance is weakening, the growth rate of exports is dropping. The real exports of goods and services accounted for a 1.8 percentage point contribution, whereas in the fourth quarter of 2012 it was quite a bit higher (4.9 percentage points). The slowdown in industry and export is further exacerbated by shrinkage in the output volumes of "Liepājas metalurgs". Overall, therefore, it makes sense to talk about a slowing growth rate.

With the export growth rate slowing down, private consumption became the main contributor to growth in the first quarter of 2013, accounting for 3.4 percentage points in GDP growth. The 4.7% growth in private consumption in the first quarter was ensured by the rise in disposable income: both the number of employed population and the gross average salary (before taxes) have grown. In addition, a greater part of the salary “on paper” has actually reached the population, i.e. because of the reduced personal income tax, net salary has grown slightly faster. An important role in the improvement of the real purchasing power of the population has also been played by price changes. In this respect, too, the situation is more favourable than before because inflation has gone down substantially and thus salary raises are almost commensurate with improved purchasing power. Overall, the real net remuneration fund in the first quarter has increased by 8.8%, which is the fastest growth since "the years of plenty" and has given households an opportunity to spend more. Private consumption could retain its leading position in the coming months as well, yet its ability to sustain rapid GDP growth in the case of a small and open economy is not inexhaustible.

Changes in inventories (+1.4 percentage points) and government consumption (+0.2 percentage points) also have played a positive role. On the other hand, the role has been negative for investments or the gross fixed capital formation (-2.5 percentage points). With imports on the rise, this component also retains a negative contribution (-0.7 percentage points).

In July, the Bank of Latvia will publish updated predictions of macroeconomic indicators. It is worth noting that it previously predicted a 3.6% GDP growth in 2013. The results for the first quarter have shown better results than expected, yet prospects for further growth are not any clearer. The development scenarios for "Liepājas metalurgs are still unclear. External demand is weak and unstable, moreover, if previously Latvia’s main trading partners continued to grow rather well, at this time a different dynamic is the case in their economies: in some the economy continues on the path of stable growth or at least retains a positive rate of change (Lithuania, Sweden), in others it is slowing (Estonia, Germany, Russia). The drop in investment in the first quarter likewise gives rise for no optimism regarding the resumption of faster export growth. While the period of uncertainty continues, caution remains the rule of thumb.