Low investment activity continues to hinder growth

For a second consecutive quarter, weak investment activity has substantially impeded economic growth. The information published by the Central Statistical Bureau indicates that gross domestic product (GDP) in the second quarter grew only by 0.6% (seasonally and workday adjusted data at constant prices) quarter-on-quarter, with the year-on-year growth reaching only 0.8%. Compared to the flash estimate published in July, the quarterly growth has been improved by 0.2 p.p. It however, fails to substantially impact the annual projections of GDP, as the previous quarters have also been revised.

In the second quarter investments continued to decrease, with the annual changes remaining pronouncedly negative (-24.7% seasonally and workday adjusted data at constant prices). Once again the disruption in the European Union (EU) funding is to blame. It is most evident in the construction sector which experienced a substantial drop in activity at the beginning of the year, most particularly in the road and non-dwelling building segments. Road construction activity however is slowly recovering (as anyone driving down Brīvības Street would confirm) and in the coming quarters it will also be reflected in the data. On the other hand, in the segment of construction of non-dwelling buildings silence has set in as the projects from the previous planning period (e.g. Riga Castle, the Natural Sciences Academic Centre of the University of Latvia, Latvian National Art Museum) have been finalised.

Sector-wise, the very impressive performance of manufacturing deserves to be noticed (+6.8%), as it compensates the extremely bad results in construction (-16.9%). A positive contribution also came from the trade sector (+5.4%), which was mainly determined by export-oriented wholesale trade not the domestic consumption driven retail. An unpleasant surprise was the performance of real estate branch (-3.1%), which previously showed signs of improvement.

Slower wage growth in the second quarter did not impede private consumption, which continues to provide a positive contribution to GDP growth. The increase in private consumption is somewhat of a surprise, taking into account relatively moderate growth in retail trade. Even though consumer confidence regarding the material well-being of their families has slightly worsened, it is still optimistic and remains close to the historically highest level.

In nominal terms, exports decreased in the second quarter, yet it mostly happened on account of falling prices. In real terms, the annual rate of export growth was positive. The predictions regarding external demand continue to worsen therefore the rise in the real amounts of exports is somewhat a success. Product groups such as wood and wood products, food, pharmaceuticals and cereals deserve to be mention, as they have made a positive contribution to export growth. Situation with import is rather similar: it experienced drop in nominal terms (primarily caused by the drop in the import prices of mineral products) but, growth in real terms.

Overall, the beginning of 2016 highlights the dependence of investments (and the economic growth at large) on EU funds, which makes one question the sustainability of the current situation and cast doubt on what we understand with the word 'investments'.  One cannot but agree with the assertion that a part of investment projects implemented with the help of EU funding would never have been carried out if we had to finance them on our own. Even though we could continue in this manner at least until 2020 (assuming that BREXIT will have no impact on the amount of funding available), the distribution mechanism of the next planning period is still not clear. Behind the scenes, some suggestions point to switch from subsidies to lending, which would make investors think not only about obtaining the funds but also about paying them back. Will we use EU funding also if the format is changed from subsidies to loans?  And if we do not, will economic growth be as slow as experienced at the beginning of this year?

APA: Vilerts, K. (2019, 17. jun.). Low investment activity continues to hinder growth. Taken from https://www.macroeconomics.lv/node/1875
MLA: Vilerts, Kārlis. "Low investment activity continues to hinder growth" www.macroeconomics.lv. Tīmeklis. 17.06.2019. <https://www.macroeconomics.lv/node/1875>.

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