Private consumption behind the GDP growth
According to the data of the Central Statistical Bureau (CSB), gross domestic product (GDP) of Latvia in 3rd Quarter 2015 increased by 1.0% quarter-on-quarter and 3.3% year-on-year. GDP growth turned out to be faster than predicted in the flash estimate published at the end of October.
Similar to the previous quarter, in the third quarter it was again private consumption that contributed substantially to economic growth, increasing by 5.2% year-on-year. The increase in private consumption was primarily bolstered by the rise in disposable income, which reflects the rise in real net compensation. The available information on retail volumes, which continued to increase in the third quarter, pointed to the likely growth of private consumption already earlier.
Moreover, it is worth mentioning that the contribution of fuel to the retail volume growth kept shrinking (1.1 percentage points in the third quarter, whereas in the previous two quarters its contribution was respectively 2.9 and 1.8 percentage points). That is an indication that the growth in consumption has become more pronounced in other product groups, for instance, in the retail trade of computer software and telecommunications equipment. Increase has been observed also in the retail trade amounts of household electrical appliances, which corresponds to relatively high consumer expectations as they plan for improvements in their household conditions in the near future.
Even though the total consumer sentiment index dropped in the third quarter, particularly because the view of the population regarding the country's economic growth deteriorated, the view of personal financial situation has remained positive, indicating that a fast drop in private consumption is not likely – at least not in the near future.
The amount of investment increased by 6.4% year-on-year. In contrast to earlier indications (the low number of construction permits granted; low evaluation of the construction amount supported by orders), the rate of investment growth was faster than predicted. It seems that the geopolitical situation of the region, because of which investors tended to be cautious before, is having an ever lesser impact on investment. The European Union (EU) funds have been important factors behind investment growth, therefore the transition to the new planning period may initially be reflected in a dropping rate of investment growth. For the future of investment, it will be of essence how and how quickly we manage to use EU funds; the situation in the lending market will likewise be of importance.
Export amounts in the third quarter increased by 1.1% year-on-year. After the less than promising results in August, the nominal goods exports in September posted a higher rate of growth, owing both to exports of plant derived products (including cereals) and exports of metal products. Service exports also posted growth in the first two months of the third quarter. Import amounts grew 4.5% year-on-year in the third quarter.
GDP growth this year was primarily supported by private consumption, which, in all likelihood will also determine growth in the next quarters. Yet we have to reckon with the possibility that a similarly high rise in compensation may not be the case in the longer term. As it drops, the question of how to promote export growth and maintain investment growth will yet again come to the forefront.