Has foreign trade activity passed its lowest point?

In the fourth quarter of 2023, Latvia's current account deficit stood at 1.6% of the gross domestic product (GDP), with the amount of funds injected into the Latvian economy by residents of other countries being 176 million euro less than that paid for transactions conducted with other countries.

Overall, Latvia's current account deficit totalled 1.6 billion euro or 4% of GDP in 2023. Thus, after a larger deficit in 2022, the current account returned to a level similar to that observed in 2021.

2023 was a year of stagnation for Europe as a number of trade partners important to Latvia experienced a recession, with the slowdown of the German economy being particularly significant. Estonia has also been experiencing a protracted period of economic adversities, and the economies of Sweden and Lithuania have been likewise weak. However, the end of the previous year signalled a more positive outlook for 2024 – in the fourth quarter, Latvia's foreign trade turnover even increased somewhat quarter on quarter. Europe might expect a faster rebound of economic activity over the course of 2024 as the taming of inflation will contribute to the recovery of the consumers' purchasing power, while the expected reduction in interest rates will allow investments to pick up, thus supporting the overall strengthening of external demand.

Exports of goods has ended the year on a slightly more positive note

In the fourth quarter of the previous year, the value of Latvia's exported goods increased after a fall that had been lasting for four consecutive quarters. Compared to the third quarter, exports of agricultural products registered growth, exports of wood also increased slightly, and overall, in the fourth quarter exports of the majority of goods experienced either stable export levels or modest increases.

However, compared to the end of 2022, exports of goods was one tenth lower mostly on account of the performance of two commodity groups – mineral products (petroleum oil, gas and electricity) and articles of wood. In the case of mineral products, this was due to considerably lower prices, while exports of articles of wood had suffered more from the impact of the weak foreign demand. Meanwhile, the value of exported textile articles and food products (including alcohol) increased.

Overall, in 2023 mineral products accounted for a half of the decline in goods exports, while wood products – for about one third of the decrease. Exports of agricultural products was one tenth lower (mainly due to the poor harvest of cereals), while the demand for machinery and electrical equipment was more stable. An increase was recorded in exports of food and alcohol still dominated by re-exports of these goods to Russia.

Imports of goods reflect a decrease in imports of mineral products

Similar to the developments in exports, imports of goods also increased somewhat at the end of the previous year; however, the overall volume of goods imports still remained well below the level recorded in 2022, representing a drop of almost 15%. The lion's share of the drop in the value of imports was made up of mineral products – about three quarters of the decrease were attributable to lower energy imports. In other commodity groups, the decline was less pronounced; however, the value of imported machinery and electrical equipment, and metals decreased by 10%. At the same time, the value of imported food products increased.

Overall, the decline in imports was broad-based in the previous year mainly at the expense of the already mentioned mineral products – during 2023, energy prices returned to normal levels, significantly lower than those observed in 2022. With the restrictions on trade with Russia coming into force, imports of wood and metals also decelerated last year. Meanwhile, the import volumes of various food products and vehicles exceeded those of other goods.

Tourism continues to grow, while the performance of freight transportation is weaker

In the last quarter of 2023, trade in services developed at a slightly slower pace than in the previous quarters, and this was mainly due to weaker exports of road transport and computer services. Exports of travel services decreased as the most active tourism season was coming to an end; yet, on an annual basis tourism activity still continued to expand, with travel abroad by Latvian tourists increasing in particular. Professional and management consulting services which were among the fastest growing ones until recently experienced a slightly faster decline in both exports and imports in the second half of 2023.

Overall, 2023 was not a bad year for services: the tourism sector continued to weather the challenging circumstances quite successfully, exports of transportation services by air increased; however, telecommunication, computer, information and other business services that had seen a rapid growth in the previous years, slowed down somewhat. As ties with Russia weakened and the economic environment in Europe had seen better times, transportation services by road, rail and sea experienced a greater negative impact.

Foreign direct investment remained at an average level despite a more unfavourable investment environment

At the end of 2023, the size of foreign direct investment transactions was smaller than that recorded in other quarters of the year. In the last months of 2023, the outflows of funds were relatively similar to the inflows of investments. This situation occurred mainly due to higher debt repayments, while fixed capital investments had not grown so rapidly. Overall, foreign direct investment amounted to 0.3% of GDP in the last quarter of the previous year.

In the current geopolitical and economic conditions seen in Europe, it can be assessed that in 2023, investments in the Latvian economy, overall, stood at a decent level, with the inflows of direct investment reaching 2.8% of GDP. Major investments were made in professional, scientific and technical services, financial and insurance activities and in manufacturing. In 2023, the most substantial investment inflows originated from Sweden and Estonia, while larger outflows were directed towards Russia.

APA: Mirošņikovs, M. (2024, 13. jul.). Has foreign trade activity passed its lowest point?. Taken from https://www.macroeconomics.lv/node/6410
MLA: Mirošņikovs, Matīss. "Has foreign trade activity passed its lowest point?" www.macroeconomics.lv. Tīmeklis. 13.07.2024. <https://www.macroeconomics.lv/node/6410>.

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