Exports continue to rise, yet investment needed for sustainable growth
The adjusted gross domestic product data broken down by sector, use and income components published by the Central Statistics Agency (CSP) confirm tendencies observed earlier. There is no doubt that in the first half of 2010 the economy shifted toward growth and exports are still rising rapidly, yet the development is uneven and varied if viewed by sector.
The adjusted gross domestic product indicator confirms the small growth observed in the CSP flash estimate: GDP grew 0.8% over the first quarter, this being the second consecutive quarter of growth. Year-on-year, GDP retained a drop of 2.1%.
As the situation in the foreign markets and the competitiveness of Latvian businesses gradually improves, the exports of goods and services continue to grow ensuring an increasingly greater pace of real growth: in the second quarter, the annual growth amounted to 9.2%.
The domestic demand has stabilized but is still weak.
- The level of investment continues to decrease (by 37.4%) and may become a material obstacle to further growth. The downslide of production costs is almost over, therefore promotion of productivity along with more effective technologies is becoming ever more important. The rapid rise in exports may start levelling off because of the high use of the existing capacities that is increasing very fast. Without any new investment, the capacities of the rapidly growing industries may be exhausted within a few quarters, but expanding them will take time and financial resources, therefore it should be considered already now. That is an indication of the decisive roles a more goal-oriented deployment of EU funds and a more active crediting policies of commercial banks could play.
- An even more positive GDP contribution than before in the second quarter was ensured by variations in stocks (11.7 percentage points). Stocks characterize the difference between supply and demand, i.e. the produced and the imported and the consumed and the exported. Despite the overall logical tendency - as demand resumes stocks are supplemented - new raw materials are bought, the amounts of the finished products are increased - the size of the contribution is surprising.
- Because of the cutting of state budget expenditure, public consumption also continued on a downward trend, contracting 6.9% year-on-year in the second quarter.
- The most sizeable component of the domestic demand - private consumption - in the second quarter dropped only 1.4% year-on-year. Many have expressed puzzlement over the rise in the sales data closely related to private consumption, but one should remind oneself that sale amounts had undergone a very rapid drop. Consumption during the recession dropped more rapidly than income because of the accumulation of prudent savings. At the beginning of 2010, owing to a better assessment of the Latvian economy and the financial situation of own households, the mood of consumers improved by leaps. With their view of future developments improving, the population resorted less to prudent savings and, within the range of their possibilities, even made use of the lowered prices purchasing various goods for long-term use. Given the very low base, this impulse was very important in promoting changes in consumption.
The stabilizing of private consumption along with the need for intermediate goods necessary for production determined a very rapid increase in import volumes. Thus in the second quarter the real imports of goods and services not only entered the zone of positive annual change but immediately reached a two-digit number - 13.6%. As imports grew rapidly, the improvement in net exports that lasted for more than two years has been exhausted this year and the contribution of exports to the annual change was negative (-2.0 percentage points).
As far as separate industries are concerned the previously observed trends persisted - the results were better in those industries where output is tied to foreign demand. Processing industry grew particularly rapidly in the second quarter, 15.3% year-on-year and 4.4% quarter-on-quarter (according to the seasonally adjusted data as assessed by the Bank of Latvia). The transport and communications industry also continued to grow but it is undergoing structural changes and therefore the rail and port turnover is decreasing while the volume of cargoes transported by truck, transportation of oil products through pipeline and the turnover at the "Riga" passenger terminal is on the rise. Negative development is still pronounced in construction - the industry value added in the second quarter dropped by 35.3% year-on-year. Until a turning point is reached in the dynamics of investment, i.e. a rise thereof, construction output will not be able to grow.