Latvian gross domestic product continued to grow in the second quarter

According to the flash estimate by the Central Statistical Department gross domestic product (seasonally adjusted data at constant prices) in the second quarter grew 1.0% over the first quarter. It is a notable achievement, particularly against the background of other countries whose growth, under the impact of the European debt crisis, has slowed substantially. This development, however, also points to a gradual slowing of the Latvian economy, particularly if compared to the rapid growth in the middle of last year when GDP quarterly growth rates were one-and-a-half to two times more rapid. As could be expected, the annual growth rate failed to reach the one of the first quarter and dropped to  +5.1% (thus almost two percentage points less than in the first quarter).

There is this joke that once you are holding all trumps in your hand, life switches to chess. This would be an apt characterization of the developments of recent years in the Latvian economy. Having put our economy in order after much hardship and effort, the global economy seems to be throwing a tantrum. It is a sad realization that were it not for the global problems, the rate of our economic growth would be so much more impressive and the improvement in the purchasing power of the population would be more convincing.

Yet, if we look from a different angle, we are holding trumps right now, if not the most powerful, yet strong enough for a good card game. Moreover, against this background of economic uncertainty many may "pass" but the bold ones may pick up a really lucky card. This is reinforced by news from some branches about conquering new market shares in the export markets and some very ambitious plans: e.g., the fish industry is ready to open new production units and increase exports to the European markets.

So what trumps are we holding in our hand? The competitiveness improved during the crisis and the more positive mood in Europe precisely in our main trading partners. It is so convincing as if someone had taken the list of Latvian goods and services importers and had assign to them the highest business and consumer confidence indicators. Demand, of course, is higher in the countries where the situation is better. Yet these main trading partners account for a stable proportion in Latvian exports. This is what the figures tell us:

• The economic confidence indicator in January—July of this year has been in the positive area, i.e. above 100 points, in only five European country. Businessmen and consumer have demonstrated most optimism in Latvia (103.9 points), followed by Germany (102.9 points), Estonia (102.4 points), Sweden (101.3 points) and Lithuania (100.2 points).
• If we consider Latvia's goods and services exports average distribution by country in the years 2008 – 2011, the above four contribute the greatest proportion:  Lithuania (13.7%), Estonia (11.2%), Germany (7.6%) and Sweden (5.6%).

Yet the future is full of uncertainty. Even these last fortresses are losing the heights of their optimism. The German economic confidence indicator deteriorated by 3.7 points in July, sliding under the 100-point mark. Albeit not as fast as elsewhere in Europe, the confidence indicators in Lithuania and Estonia are also gradually creeping down. The oil price dynamic will also be of importance, particularly taking into account the prospects of Russian economic growth. This market, alongside the above mentioned European countries, is also of great importance to Latvian exports. From 2008 to 2011 the export share to Russia was 8.9% on average.

The gradual slowdown in the growth rate is obvious already now: because of the impact of the higher base, it can be particularly clearly observed with the year-on-year growth rate. The industrial output in the second quarter grew 5.1% (8.3% in the first quarter). While retail trade retained a high growth rate in the second quarter at 7.9%, in the first quarter it was heads above (+11.7%). If automobile sales are added to retail, then the drop in the growth rate is even more substantial – from 11.3% in the first quarter to a mere 4.9% in the second quarter. A drop in growth rate is likewise observed in transport – the growth rate in port cargo transports (in tons by the weight of actual cargoes transported) has dropped from 22.6% to 12.2%, and for transports by rail from 16.0% to9.7%.

The dynamic of dropping growth rates has not been halted, it will remain in the near future as well. While convincing solutions to European economic problems are yet to be found, real drops in production volumes for particular branches cannot be excluded as cannot a future drop in the growth rate of GDP.

An updated and more detailed GDP for the second quarter will be published on 7 September. In the previous quarters GDP was adjusted upward (to higher growth rates) whereas this time the adjustment may take the opposite direction.