GDP in the Second Quarter

A GDP drop of 18.7% in the second quarter of 2009 is not surprising, and this downward trend is expected to continue to bottom out in 3-4 upcoming quarters. The drop stems from macroeconomic imbalances and the boisterous growth triggered by strong domestic consumption of previous years. It is the domestic demand and imports relying on it that have recorded most severe contractions. The global crisis has in part closed international markets as well, yet exports fell less sharply than imports, and the overall external (imports/exports) balance has notably improved.

Further on, the economic upturn will strongly depend on the pace of recovery, stability of external market positions, and confidence in Latvia's macroeconomic policy, i.e. the budget planning ability. Reforms aimed at improving the business environment and achieving effective utilisation of public funding as well as the activities in support of businesses are an important home exercise by which to ensure effective foreign market recovery.

Despite a significant annual drop, the GDP flash estimate released by the Central Statistical Bureau a month ago points to a quarter-on-quarter 1.6% drop in GDP in the second quarter, suggesting some moderation after a sharp 11.0% contraction in the first quarter. Meanwhile, manufacturing recorded a slight improvement, with output above the first quarter level.

According to the CSB estimates, the real annual contraction in GDP in the second quarter was slightly less pronounced than preliminary data suggested. Year-on-year, real GDP dropped 18.7% in the second quarter on account of a significant weakening of domestic demand (investment - ‑12.6 percentage points, private consumption - -16.1 percentage points), and sluggish external demand. The narrowing in exports (by 17.9%) coupled with an extremely fast contraction in imports (by 39.3%) triggered improvement of the external balance of goods and services, with net exports contributing 15.9 percentage points to the positive changes in GDP.

Sluggish demand and shortage of financial resources were the factors that underpinned moderation across all sectors of the economy; hence it is not surprising that overall value added in the breakdown by sector records a more or less pronounced annual contraction for almost all of them. Meanwhile, the overall growth rate was most affected by substantially contracting trade (-5.8 percentage point contribution) as well as notably narrowing manufacturing (-2.8 percentage points), construction (-2.5 percentage points), and the transport and communication sector (-2.2 percentage points).