Private consumption demonstrates excellent performance in the second quarter

The gross domestic product (GDP) indicator updated by the Central Statistical Bureau points to higher economic growth than previously estimated. Quarter-on-quarter, GDP in the second quarter grew 0.7% (adjusted upward by 0.2 percentage points), whereas year-on-year, the growth was at 4.4% (adjusted upward by 0.6 percentage points).

Already in the first quarter of 2013, private consumption became the main driver of growth, but in the second quarter, its increase (by 6.6%) has ensured a 4.7 percentage point contribution in GDP growth. The growth in private consumption is mostly ensured by the rise in disposable income, primarily, the salary fund that has been growing more rapidly in recent quarters as a result of both rising average salary and improving employment indicators.  Moreover, in contrast to the rises in income of the "fat" years, the current growth is more sustainable and is based on corresponding rise in productivity.

There is another aspect that promotes a rise in consumption: the reducing of previous accruals. In this case, we are mostly talking about the accruals of cash currency in lats, which are gradually dropping in expectations of euro introduction. Households opt for different ways to prepare for the changeover. Some deposit their cash accruals with banks, others rush to the points of currency exchange, and others still spend what they have been saving on purchases. This dynamic is expected to become even more pronounced by the end of the year. The survey[1] conducted by Swedbank in June indicates that 51% of the Latvian population are planning to spend their lats cash currency.

I was waiting for investment data with worry and interest, for various indicators characterizing investments have been very uneven and pointing in opposite directions of change. In the first quarter, investment dropped rapidly, but the operational data for the second quarter did not make future developments clearer. In the second quarter, the imports of transport vehicles dropped, but information from businesses, registration of transport vehicles and more detailed analysis of external trade showed that it could be partially related to re-exports, without affecting investments. Construction industry production, on the other hand, performed well in the second quarter. The data published today indicate that in the second quarter, the formation of total fixed capital has dropped by 1.8%. Given the fluctuations in investments, such a moderate drop is to be considered maintenance of the previous level.

Albeit with a slower rate of growth, exports are demonstrating a stubborn resistance to the weak external demand and domestic troubles. The real exports of goods and services in the second quarter have increased by 2.3% Even though deterioration could have been expected in exports and industry as a result of the problems of Liepājas Metalurgs, the negative indicators have been counteracted by another enterprise, Rīgas Kuģu būvētava, which ensured exports of several ships to Russia in the second quarter. A great positive contribution in the exports of goods was also made by the exports of plant products and other exporters, demonstrating that competitiveness was sustainable and they are capable of finding new markets. Exports this year are also benefiting from a greater number of visiting tourists and the rapidly growing branch of information technologies.

The real imports of goods and services dropped by 4.2% in the second quarter. This fact gives rise to contradictory feelings. As far as it involves substituting imports with domestic products, we can only be happy. We should not even be particularly saddened over the possible drop in re-exports in some groups of goods, albeit it would reduce profits for some merchants. There is more cause to worry about the aforementioned investments, because imports of capital goods goes hand in hand with new investments and hopes for higher value added in the future. Yet even here it would be premature to despair, because it is often the quiet, publicly unknown large investment projects that come as a pleasant surprise.

This time the surprises have come from public consumption and changes in stocks. In contrast to previous quarters, public consumption has shown signs of life (+5.8%, +0.8 percentage points), although higher rates of growth might have been expected even earlier. Changes in stocks, however, have determined a huge negative contribution (-4.9 pp). The drop in stocks could be explained by the aforementioned events in external trade:

a) Liepājas Metalurgs has reduced the imports of raw materials (and consequently also stocks),

b) the ships built by Rīgas Kuģu būvētava have been launched and exported, reducing the stocks level,  

c) the exports of last season's plant products have also reduced stocks.

In a breakdown by branch, the highest year-on-year growth is still posted by transactions with real estate (13.2%; contribution to GDP annual growth - 1.3 pp). High rates of growth were also posted by public services branches (administration, medicine, education; 9.1%; 0.4 pp), construction (5.3%; 0.3 pp), trade (6.2%; 1.1 pp), as well as hospitality and catering branch (5.9%; 0.1 pp). A negative surprise came from the agriculture and forestry branch (-4.8%; -0.2 pp), where negative trends are the case both in forestry (reduced felling sites) and agriculture (smaller harvests).

As far as subsequent quarters are concerned, the economy is likely to move along the previous track, with private consumption as the main support for growth and exports as a necessary addition to ensure sustainable growth.

[1] Swedbank population survey was conducted in June 2013 in collaboration with TNS Latvia within the framework of measuring the “Latvian euro preparedness index”, which involved surveying  480 people in Latvia in the age group 15 to 74. http://www.swedbank.lv/zinas/20.08.2013/

APA: Rutkovska, A. (2023, 04. jun.). Private consumption demonstrates excellent performance in the second quarter. Taken from https://www.macroeconomics.lv/node/2092
MLA: Rutkovska, Agnese. "Private consumption demonstrates excellent performance in the second quarter" www.macroeconomics.lv. Tīmeklis. 04.06.2023. <https://www.macroeconomics.lv/node/2092>.

Similar articles

Or log in with a social profile account:

Restricted HTML