GDP growth in 2011 faster than estimated
The 4th quarter indicator updated by the Central Statistical Bureau and its reviewed data on the year overall indicate that in 2011 gross domestic product (GDP) grew 5.5% (5.3% according to the flash estimate made earlier). Thus in 2011 Latvia was one of the European economies experiencing the most dynamic growth – according to the latest published data, in the ES-27 GDP grew 1.5% on average. Our neighbours, however, have posted an even more impressive growth: 7.6% in Estonia, and 5.9% in Lithuania. Thus, after learning the harsh lessons of the crisis, the Baltic states have managed to stand fast against the global winds and conquer larger market shares abroad.
At both the beginning and end of the year, quarter-on-quarter growth was more moderate compared to the middle where GDP posted the following sequential quarter-on-quarter growth: 1.1%, 2.0%, 1.5%, 1.1%. The adjusted 4th quarter indicator has thus posted a slightly higher growth than the previously estimated 0.8%. By contrast, because of the adverse global developments, the GDP of the EU-27 countries in this quarter dropped 0.3%, including a drop for Germany, the European "heavyweight". Data can still be reviewed, however, and the updated indicators for our neighbouring countries also turned out better than the flash estimates: as early as end of February, Lithuania adjusted her 4th quarter GDP from -0.9% to +1.0%; and Estonia adjusted hers this morning from -0.8% to -0.2%., It is interesting to note that in the case of both Latvia and its neighbouring countries, tax collection turned out to be more efficient, suggesting a shrinking proportion of the grey economy.
In 2011 as previously, the real goods and services exports retained its position as the main driver behind the economy. Despite the negative trends in the global economy, and particularly in Europe, the Latvian exports posted very rapid growth (12.6%). The growth in export volumes was fostered by the regained competitiveness in manufacturing and the rapid increase in investments that allowed an increase in production volumes in enterprises where capacities were inadequate to satisfy demand. The slowdown in economic growth in Latvia's main trading partners, however, precludes any reason to hope for an equally impressive export growth in the near future, even in light of the improved GDP indicators.
Even though the growth in external demand was higher as a result of a very rapid increase in investments, domestic demand also developed dynamically. In 2011, a 24.6% rise was observed in the dynamic of gross fixed capital formation. As a result, the total level of investment rose substantially, reaching 26.4% of GDP in the fourth quarter (including the gross fixed capital formation at 26.3%). Positive changes are obvious also in the structure of investment, with productive investment growing more rapidly: in the first three quarters of 2011 (data for the year overall are not yet available) half of non-financial investment was accounted for by investment in industry and transportation. The rise in investments is ensured both by the investment projects financed with EU funding and by the investment of the large local enterprises and renewal of lending to competitive projects. A substantial contribution was also made by foreign direct investment.
The greatest share of domestic demand – private consumption –, increased by 4.4% in 2011. Such an increase looks impressive against the background of European data, yet given the low base and the more rapid rise in other GDP expenditure components, the Latvian rise should be considered as moderate. The renewal of private consumption is slow because of weak purchasing ability and high level of household indebtedness. Albeit the rises in employment and average salary ensure a rise in disposable income, the increased tax burden and rising prices meant that the improvement in purchasing power was limited. The impact of taxes and price rises will abate in the future, yet any renewal of private consumption will be circumscribed by the slowdown in economic growth as a result of lower external demand.
The amounts of goods and services imports grew 20.7% in 2011, primarily because of imports of intermediate consumption goods for the manufacturing of export production. The rapid rise in investment also caused a substantial rise in the imports of capital goods.
In a breakdown by branch, the greatest surprise in 2011 was provided by construction, which demonstrated an acrobatic leap in the second quarter and continued to grow rapidly, with the annual growth rate reaching 25.9% in the fourth quarter. Taking into account the hardly auspicious beginning early in the year and base effect, construction in 2011 overall grew by 12.4%. Owing to a substantially larger number of tourists, good results, i.e. a 21.9% growth in 2011 was demonstrated by the accommodation and food services sector. Tourists contributed also to an increase in sales volumes and trade thus grew by 8.7% in 2011. A more important factor here is the postponed consumption, however: with the consumer confidence growing, the population was more active in spending their accruals of previous years evidenced by a rise in the demand of durable goods. The most important branch related to success in the export markets is, of course, manufacturing. The value added generated by this branch increased 11.7% over the year and, because of increased volumes, retained an important role in the rise of overall value added, ensuring a contribution of 1.4 percentage points. Another branch closely related to exports is transportation services, which grew 8.0% over the year.
2012 has begun with a number of positive developments: trade, industry, and transportation services as well as confidence indicators in January and February have all improved. Despite this encouraging news, uncertainty in the external markets remains high. Yesterday the European Central Bank downgraded the GDP predictions of the euro area countries, forecasting a 0.1% drop instead of the previously predicted 0.3% growth. Demand is dropping also in Latvia's main trading partners, which will lead to a heightened competition for export market shares.
 ECB oficially publishes its predictions in intervals; for 2012 they are thus estimated in the range of ‑0.5% to +0.3% instead of the previously estimated -0.4% to +1.0%, with a greater possibility of a more adverse scenario coming to pass http://www.ecb.eu/press/pressconf/2012/html/is120308.en.html