GDP on a moderate rise for five consecutive quarters

The adjusted indicator of the Central Statistical Agency (CSP) confirms the observation of a 1.1% quarter-on-quarter rise in the gross domestic product (GDP) in the last quarter of 2010. Compared to the fourth quarter of 2009, i.e. within a year, GDP has risen by 3.6%.  

With a negative annual growth in the first six months and positive in the last six months, the year overall ended with a close to neutral result. To be more precise: the total real GDP in 2010 dropped 0.3% year-on-year. Calculating to one inhabitant, GDP even grew slightly last year.

As a result of the base effect, a 5.2% year-on-year growth in private consumption was registered in the fourth quarter of 2010 while the overall yearly growth was rather sluggish and unconvincing. With several factors combining, caution in spending was once again on the rise at the end of the year. The 2011 government budget fiscal consolidation measures were delineated more precisely and confirmed the expected increases in the tax burden, i.e. a negative effect on purchasing power. Negative developments in the foreign markets also became more obvious, raising concerns regarding future growth of the economy.

The turning point in the investment dynamics was the third quarter of 2010, when the rapid drop in investment level was arrested. In the fourth quarter, a small drop (1.8%) was still observed in the formation of overall equity capital but, when evaluated against the backdrop of the previously very steep contraction, the level is virtually unchanged. There is good news and bad news regarding investments. The good news: the number of construction permits granted for the construction of industrial production and warehouse buildings is on the rise and so are therefore productive investments that are at the core of economic growth. The bad news: the investment level is low and thus inadequate for ensuring a more rapid economic growth. There is however another piece of news that should be greeted with cautious optimism: the international rating agency Standard&Poor's raised the evaluation of the future prospects of Latvia's credit rating from stable to positive, yet, while there is no certainty regarding the taxes and 2012 budget, that is unlikely to be a sufficient assertion of confidence or promote the attraction of new foreign investment. 

The real goods and services exports in the fourth quarter grew 13.8% year-on-year.  Export growth benefitted both from the regained competitiveness and improved demand. The rate of growth however is slowing down slightly and such dynamic can be predicted for the future as well, both because of the higher base and the inadequate level of investment for a faster increase in production capacities.

The imports of goods and services saw a significant rise at 16.7%. With foreign demand rising, the need for raw materials for export goods manufacturing is also on the rise, which acts to increase import volumes. So does the slow improvement in domestic demand.

Evaluating the contribution of separate industries, the growth was the most rapid in manufacturing both in the fourth quarter and 2010 overall, accounting for the largest share in economic growth. Trade recovered quickly in the third and fourth quarters, ensuring a significant positive contribution to in the year overall. Transportation and communications as well as electrical power, gas and water supply likewise had a positive effect on overall growth. From the yearly perspective, there was a drop in construction, which amounted to the most substantial negative effect on the rise of value added, yet the rate of the drop slowed down. The better construction confidence and the rise in construction permits granted in some segments invites the conclusion that improvement in this industry is at hand.

Latvia's openness is significant: the total of goods and services imports and exports amounts to 107.6% of GDP (in practically equal shares: exports – 53.4%, imports – 54.2%). This tends to influence both the demand for a variety of goods and trading conditions, i.e. the difference between import and export price changes. In the second half of 2010 the trade regulations improved: the rise in export prices exceeded the rise in import prices affording the exporters a better profit. A small and open economy is to a great extent vulnerable to global developments, therefore we must once again reassert that the future GDP dynamics also will to a large extent be determined by global events.