Exports to drive economic recovery
The real GDP in the third quarter contracted 19.0% year-on-year.
The GDP drop was primarily determined by a continued weakening of the domestic demand in turn impacted by the reduction of state budget in June and worsening of consumer confidence. Foreign demand, however, retained its second quarter level and that allows us to look to the future with more optimism: budget consolidation has fostered the trend toward improved competitiveness and the foreign markets are gradually recovering, therefore growth in some of the export-oriented branches is stabilizing.
The gradual resumption of economic activity in several EU countries determined the stabilization of foreign demand. Along with the improved competitiveness of Latvian producers that stimulated an upward trend in several processing industry branches. Although the continued downslide of domestic demand continues to affect production, a small quarter-on-quarter growth was observed in processing industry as a whole.
Private consumption in the third quarter dropped 27.9%. Previously the downward trend was mostly determined by the growing uncertainty regarding future income and the related accumulation of emergency reserves, whereas the third quarter was marked by a direct decrease in available incomes, which may be the main reason behind such a step drop.
Since the beginning of the year there has been a reduction in wages, which, after the subtraction of taxes and social payments form almost half of the income. Along with the rapid rise in unemployment, however, social benefits received also grew substantially, thus partially compensating the contraction in wages and incomes for the self-employed and allowing for a lesser drop in private consumption. The income available to the population contracted more in the third quarter because during this period, the term for receiving unemployment benefits and local government aid came to an end. For this reason, a part of the households are apparently using reserves accumulated in previous periods and this trend could become even stronger in the fourth quarter. The continued reduction in wages in the public sector, resulting from fiscal policies, will also limit the growth of consumption in the near future.
The continued limited lending and large reserves of unused potential determined a diminishing level of investment - the formation of total equity contracted by 39.4% in the third quarter. As the construction of new buildings diminished very rapidly (the number of construction permits has shrunk more than twofold over 2007), the repair and renovation segment has become more active.
As the domestic demand decreased so did imports of goods and services and, for the eighth consecutive quarter, the net contribution of exports to the annual changes in GDP has been positive. The drop in imports was fostered by the structural changes in demand: the reduction in demand for capital goods and durable goods produced outside Latvia
The gradual recovery of the global economy and the improvement in producer competitiveness gives us a chance to predict a rise in exports evidenced also by current situation surveys. It is the further development of the exports sector that will to a large extent determine how rapidly the renewal of confidence, decrease in unemployment and positive changes in domestic demand will take place.