Growth is back, as expected, but uncertainty still looms
As expected, with the number of new Covid-19 infections in Latvia gradually decreasing and the containment measures adjusted accordingly, several sectors saw significant activity improvements in the second quarter. This was also reflected in the growth of gross domestic product (GDP).
Finding the ways to organise events in an epidemiologically safe manner, the activity in sectors involving social gathering (and also mobility) can be expected to increase further in the third quarter. At the same time, uncertainty remains high with regard to both the potential future evolution of the virus and the respective solutions. Currently, the numbers of new Covid-19 infections in Latvia are considerably lower than at the beginning of the year. Nevertheless, they are slightly above the peak of the so-called first wave of the pandemic. As a result, the mood is a little like in a social gathering that took a long time to prepare. It has started as planned, but you cannot get fully rid of the feeling that manifestations of joy might be out of place or untimely.
According to the flash estimate of the Central Statistical Bureau (CSB), in the second quarter of 2021, GDP grew by 3.7% quarter-on-quarter and 10.0% year-on-year in seasonally and calendar adjusted terms. Despite the concerns over the shortage of components and rising container shipping costs, the data from April and May point to a solid development of manufacturing and exports of goods. This was supported by the recovery of economic activity and demand in trade partner countries. Some signs of improvement are observed in air transport and tourism, although the activity still remains low.
The wonderful weather conditions we are enjoying this summer might have healed some hearts broken by inability to travel somewhere warm. But, at the same time, they are likely to have caused "gaps" in energy and agriculture where beating the last year's record-high harvest figures will be difficult.
With restrictions on face-to-face retail trade easing and households releasing their pent-up demand for consumer goods, retail sales increased considerably in the second quarter.
A particularly high rise in June was registered for the retail sales of clothing and footwear. Restrictions were also progressively lifted in other services. The availability of many services has improved gradually, with the implementation of safety policies for event attendance. As a result, private consumption is likely to have grown quarter-on-quarter in the second quarter and can be expected to increase further in the third quarter. Unwinding of the savings built during the pandemic will be a likely contributor.
Data on deposits (a savings component) show that household deposits continued to grow until June. This could signal both rising incomes and lingering caution. The presence of caution in June could be explained by the persistently low (although growing) level of activity in some sectors. This could also be affected by the expiry of furlough benefits at a moment when the uncertainty about the future path of the pandemic remains high.
Lower optimism in Latvia in July is also evident in the confidence survey data published by the European Commission.
These could already reflect the flare-up of new infections in several countries. Although the count of victims is lower, this brings back uncertainty and triggers caution. At the same time, there are several pre-requisites (level of savings, eased containment measures) for expecting further economic growth also in the third quarter.
Detailed data on GDP expenditure and changes in value added by sector are expected at the end of August.