Previous year concluded successfully, but global background points to uncertainty about future

Previous year concluded successfully, but global background points to uncertainty about future

The updated fourth quarter GDP indicator has been adjusted slightly upward: quarter-on-quarter, GDP increased by 0.8% (seasonal effects excluded) and year-on-year by 3.6%.

Private consumption in 2013 was the main engine of economic growth and it retained this leading role also in the fourth quarter, increasing by 4.3% and contributing 2.6 percentage points in the GDP growth. Mostly as a result of the increased employment level and rising real wages, the purchasing power of residents continued to rise. Price dynamic too remained favourable to consumers at the end of the year. Consumption was promoted also by reducing previous accruals in expectations of the euro changeover, spending a part of cash savings for purchases.

Investment growth was weak in 2013, and the fourth quarter indicator is also not brilliant: total fixed capital formation in the fourth quarter dropped by 10.3%. The weakness of investments in 2013 was determined by uncertainties in the external environment, a wait-and-see attitude to euro introduction and the completion of large investment projects.  The improvement in industry and export performance at the end of the year encouraged hopes to a more positive investment dynamic in the future. Recent events in Ukraine, however, renew and even increase worries in regard to attracting investment in the regions closest to Russia.

The real goods and services exports were observed to have a dropping growth rate in 2013; in the third quarter, it even turned negative. In the fourth quarter, exports retained the same level year-on-year (0.0% change). Taking into account the high base (including the good harvest of 2012) and the reduction in Liepājas Metalurgs export volumes, the success of export and industry in the last quarter cannot be considered poor: growth resumed. That unfortunately was not to last, the performance of industry in January was not at all comforting (details here).

The real imports of goods and services dropped in the fourth quarter as well (by 3.0%), which, with exports remaining unchanged, has determined a positive contribution (1.8 pp) in GDP.

Considered by sector, the greatest contributors to GDP were the service sector branches – commercial services and operations with real estate as well as state administration. The relatively weak results in construction, energy industry and mining and quarrying were expected, but the weak performance of trade (growth of only 1.7%) is slightly unexpected:  it was determined by a drop in wholesale amounts, for in retail a 4% rise was observed.

2014 GDP growth rate will remain at about the 4% rate. If before, such projections seemed even conservative, with expectations of a better performance, now they are forced back into pessimism, for predictions of the role of exports as the main engine of growth gradually returning, have rather faded against the background of the latest events.

The impact of tensions between Ukraine and Russia on Latvia's economic growth will be negative, albeit not uniformly so in all sectors and enterprises. The above events will have an overall weakening effect on external demand. Yet it is also important what kind of production is being exported: for instance, the demand for medicine and canned goods, instead of going down could remain the same or even grow, whereas the demand for nonexpendable goods would most likely drop.

Overall we can conclude that 2014 has begun not only with the introduction of the euro but also with new challenges to Latvian policy makers, especially to entrepreneurs in their competition for export markets. The good news is that our entrepreneurs have shown time and again that they can go against the current.