Export value boosted by higher prices
Accelerated economic recovery persists both globally and in Latvia. Latvian exporters continue to export record high amounts of goods, and, as a result of the price rise, the value of the exported goods surged increasingly higher. Concern regarding raw material global supply chain bottlenecks persists; nevertheless, Latvia's imports managed to recover in the second quarter.
The rapid increase in the trade value of goods vis-à-vis the second quarter of 2020, when the international trade activity was at its low on account of the pandemic, reflects the base effect as well as a surge in prices. In real terms, however, the export growth has moderated over the last quarters, having reached a record high increase of 11.2% in two years since the second quarter of 2019, with the deepest pandemic trough in the middle of this period. Meanwhile, the growth in imports that had slightly lagged behind the recovery observed in exports before, gained momentum in the second quarter as a result of rebound in imports of raw materials and transport vehicles.
The "hot" exports of products of wood continued to dominate the value growth in exports of goods in the second quarter, supported by the demand in the construction sector and enjoying the exceptionally high price levels. Particularly accelerated growth was recorded in exports of articles of base metals as they recovered after prolonged delivery delays. The increase in exports of machinery and electrical equipment continued, and strong growth in exports of products of the chemical industry was observed for the second consecutive quarter.
Meanwhile, in the second quarter value of exports of services bounced back in annual terms on account of an increase in other business services, e.g. advertising, market research and trade-related services that had been able to maintain growth since the onset of the pandemic and in the second quarter surged by almost 30%. At the same time, exports of travel services declined, even compared to the moderate value of the services rendered in the second quarter of 2020.
With the rapid recovery of the flows of imports of goods, the deficit of the goods and services trade balance increased notably in the second quarter, i.e. up to 4.5% of GDP. At the same time, along with the income account deficit of 1.9% of GDP, the current account posted a deficit of 6.5% of GDP in the second quarter of 2021. The income account deficit was mostly a result of foreign investors' profit which had actually returned to pre-pandemic levels.
Chart. Main components of the current account (% of GDP)
In the second quarter, the largest flows in the financial account were related to repayment of the rolled-over government debt, participation of Latvijas Banka in Eurosystem monetary policy operations and reduction in monetary financial institution debt. The second quarter also saw the amount of foreign direct investment double the level registered in the last few years, reaching 5.5% of GDP. Most of investment growth was recorded in the real estate sector, trade and manufacturing.