GDP growth slackens at the end of the year

According to the flash estimate of the Central Statistical Bureau, gross domestic product (GDP) did not change quarter-on-quarter in the fourth quarter of 2015. Year-on-year, GDP (working-day adjusted data) increased by 2.6%. These data indicate that overall in 2015, Latvia's GDP could have grown by approximately  2.6% (seasonally adjusted data). After the full GDP estimate is published, there might be changes within the range of a few tenths of a per cent).

The results of the fourth quarter of 2015 are disappointing: GDP has remained at the level of the previous quarter.  Such weak quarterly growth has not been observed in the Latvian economy since the second quarter of 2013. This result, however, could not be said to be a big surprise. The available operational statistics already indicated that the results of the fourth quarter could be slightly weaker than usual. First, the relatively weak performance of manufacturing should be noted. The currently available information on two months of the fourth quarter indicates that manufacturing output may have decreased quarter-on-quarter. In retail trade, indicators have likewise been not as good as expected. The operational statistics of ports and railroad in the fourth quarter also did not point to positive changes in trends in the transportation branch. The only pronouncedly positive branch in the fourth quarter might have been the power industry, which, owing to large cogeneration production amounts, posted a substantial increase in output. The question remains open about the service industries where the real estate branch and social services play the greatest roles; these data will be available in the full estimate of GDP.

How should we assess the 2.6% GDP growth in 2015? If we consider it in the context of the development of the last few years and convergence (of income levels), then there is no doubt that the result is less than satisfactory. Yet if we are to consider the events in the external environment, which Latvia can influence to a minimal extent, then the result should be assessed as satisfactory.  The main factor limiting growth in 2015 was, without a doubt, the complicated geopolitical situation. Latvian economy suffered from it both directly (businesses affected by sanctions and the weakening Russian economy) and indirectly (postponed investment). The relatively weak growth of the euro area likewise did not encourage a faster growth of the Latvian economy.  A positive impact, speaking of external factors, was made by the reduced oil prices on consumption. Even though "KVV Liepājas metalurgs" resumed partial operations. much uncertainty remains at what capacity and if at all the enterprise can continue work. It is clear, however, that without a rebirth of metallurgy in Liepāja, economic growth in 2015 would have been closer to 2% instead of 3%.

What can we expect in 2016? So far, there is no indication that, in terms of economic growth, 2016 could be substantially better. Even though we would hope for a best case scenario, it is difficult to find branches that would determine a faster GDP growth. In manufacturing, a number of sub-branches (the food industry, production of construction materials, wearing apparel, metals and fabricated metals etc.) are facing problems. Observing recent events, there is also worry as to if and at what capacity, "KVV Liepājas metalurgs" would continue functioning. In construction, the contraction of the non-resident sector will continue to be a factor and, in some cases, interruptions in the flow of EU funds are possible. In the transportation branch, particularly as far as the ports and railroad are concerned, no fast growth is expected.  A relatively positive assessment could be made only with regard to trade and, weather permitting, the prospects of the power industry. A positive contribution will also be made by some service branches, but it is doubtful that it will substantially accelerate GDP growth (compared to what we experienced in 2015).  

Latvijas Banka currently predicts GDP growth in 2016 at 2.7%. Much will still depend on developments in the external environment. In the very near future, Europe will have to deal with its refugee crisis, which is a very complicated task, particularly from the political point of view. The issue of the global oil prices is still unclear. On the one hand, low oil prices have a positive impact on the economies, which are importers of oil products. Yet we should keep in mind that there is a number of economies, including among Latvia's trading partners (e.g., Russia and Norway) whose economies are directly dependent on oil revenues. In addition, it will be important to see if the new government undertakes any changes in Latvia's economic policy.

We should remember that the GDP flash estimate published today is partly based on operational information and partly on the results of econometric models. The full GDP estimate, which will  permit w view in GDP growth in a breakdown both by branch and use component, will be published on 29 February 2016.