Latvian GDP stable and moderate in the first quarter

The adjusted indicator of the first quarter gross domestic product (GDP) is close to previous estimates.  Compared to the previous quarter by seasonally adjusted data it rose by 0.3%. Year-on-year, however (by working day adjusted data), GDP grew by 2.0%.

Even before publishing the data, private consumption was predicted to be the main driver behind growth. Private consumption in the first quarter really did post one of the fastest growth 2.6% rise year-on-year (working day adjusted data). Private consumption was one of the main contributors to growth even before, but the first quarter was particularly favourable to it.

Along with the further rise in the average wage, outlays of the population were stimulated also by other factors: an improved consumer confidence and a warmer winter with relatively lesser heating expanses and low prices of oil, which let people buy fuel cheaper. Although the liberalization of the electrical power market increased the costs of power for households, the above factors "neutralized" this impact. Since in recent months oil prices have tended to rise, they will not represent such a favourable contribution to the purchasing power of the population.  

Because of the geopolitical background, investors were cautious last year and no particular improvement could be expected in the early 2015. The formation of fixed capital in the first quarter decreased by 0.9% year-on-year. The number of building permits granted continued to drop in the first quarter; the proposals for "softening" the Immigration Law have also not met with a favourable response in the Saeima, therefore we cannot expect much activity in the construction sector, at least not in the building sector. It is possible, however, that construction work on engineering structures will increase – the financing by the European Union (EU) play a crucial role there.

The low level of investment is the main obstacle to faster economic growth, but it is a positive development that investment in industry was on the rise in 2014 (although by the end of the year, the rise subsided). That gives rise to hope that GDP growth will be maintained.

The real export of goods and services grew by 2.7% in the first quarter. Developments in the external environment are still hard to predict, therefore exporters have to conquer new markets and to improve competitiveness in the existing ones. The situation is tense. Russia is unpredictable. Mixed news is coming from the EU countries. For example, Germany and Spain post good growth, but the picture in Greece is becoming increasingly grim. Along with changes in the external demand, export is impacted also by some domestic events.  For instance, a positive contribution to export in March was the resumption of work at "KVV Liepājas metalurgs" (which is not without problems, however – see below). There is excellent news about new export orders in the future: ten Latvian dairy producers in April obtained the permission to export their production to China; in summer, they will be joined by four fish processing enterprises.

The real import of goods and services in the first quarter dropped by 1.8%, which, along with export growth contributed to an important positive net export contribution to the rise in GDP – 2.7 percentage points.

In a breakdown by branch, the greatest contribution to growth in the first quarter was made by manufacturing (4.4%year-on-year; which was apparently an impact by "KVV Liepājas metalurgs") and financial and insurance activities (14.8%). A negative contributor to GDP growth was the energy sector (-4.1%; because of the weather conditions), agricultural and energy sector (-8.6%), and transportation and storage sector (-1.6%).

Since the new data do not represent substantial surprises, a review of GDP projections for 2015 may not be necessary: it should be kept in mind that  Latvijas Banka estimates growth of 2% . Still, the second quarter holds the promise of pleasant surprises, represented, for instance, by great successes met by exporters in China or unexpectedly high expenditure by foreign guests during the Latvian presidency of the EU Council --   most conferences, summits, and other events took place in or are still planned for  the second quarter. There is little hope for very successful performance by "KVV Liepājas metalurgs"– the latest news is not encouraging , which acts to hold the expectations for any great successes at bay.