GDP still without notable growth

According to the flash estimate by the Central Statistical Bureau (CSB), gross domestic (GDP) in the third quarter of this year grew by 0.5%  quarter-on-quarter (seasonally adjusted data). That in turn means that year-on-year GDP has increased by a mere 0.7% (working-day adjusted data). This result means that in 2016 GDP will have grown by only  1.4% or even slightly less by working-day adjusted data.

In the first six months of this year, GDP growth was slow and far from one that would ensure substantial convergence with the most prosperous countries of Europe. Moreover, GDP increase in the first six months was weaker than the euro area average.  The fact that in the third quarter no substantial increase in growth rate was likely was already obvious from operational branch information. The data of neither retail trade, nor manufacturing have been good.  

According to the CSB information, the added value of service branches grew by only 1% and that of industry by 2% year-on-year. There was some hope that, after a prolonged period of trouble, recovery of the construction branch could begin. Despite the construction work visible on streets and roads, recovery has not really taken place in the third quarter either. At least the y-o-y growth rate has not improved (compared to the first quarter) and the added value of the branch has dropped by 24%. A positive contribution to GDP growth was meanwhile made by the 4% revenue increase from taxes on products.

The year 2016 has been marked by very sluggish growth. It is likely to end with the lowest growth in the post-crisis period. The reason is a combination of several factors, including both internal and external, yet the dominating impact on slowing the economic growth rate came from shrinking investment. This was mostly (but not solely) caused by the interruption in the cycle of European Union (EU) funds. This year has taught us an important lesson: it is quite obvious what an important role EU funding plays in the growth of Latvian economy. There are various indications that in the next planning period there will be less funding and it probably will take the form of development capital rather than subsidies and grants. Therefore, within this planning period, particular attention should be paid to the rationality of and yield from the way funding is used.

In 2017, growth will become somewhat faster – on the condition that there is no new global economic and/or political turbulence. The postponed work, tied to EU funding, will resume. At the same time, some in the construction branch are already saying that 2017 also looks like no picnic. There is no assurance that procurement and the appeals that traditionally tends to follow will have ended in a timely manner, i.e. before the new construction season. The full load capacity of construction is also lower at the moment – both workers and machinery have scattered during the idle time.

Yet beside EU funds, another factor that will foster GDP growth has to be mentioned, and that is budget. In the budget approved by the Cabinet of Ministers and currently debated by the Saeima, the planned increase in wages for the public sector employees and a substantial increase in the cost items for goods and services indicate that in 2017, public consumption will be one of the growth engines. If the positive lending trend and development of the real estate market begun in 2016 continues, growth could reach recently unseen numbers. But will it be sustainable? It is clear that such a model of growth is "burning" our inner reserves – without a sustained export growth in the medium term, even the growth based on domestic demand will begin to dwindle.