Private consumption growth leader also in the third quarter

The gross domestic product (GDP) indicator adjusted today confirms a rise in growth rate in the third quarter. According to this indicator, GDP grew by 1.3% (adjusted upward by 0.1 percentage points) quarter-on-quarter and 4.5% (adjusted upward by 0.3 percentage points) year-on-year.

Already since mid-2012, the economy has retained a stable 4-5% annual growth rate, yet the main growth engines have switched positions: domestic demand exceeds the contribution of exports.

In the first quarter of this year, private consumption became the main engine bringing growth, with the increase still on the rise in the second quarter and contribution to GDP growth reaching 4.1 percentage points. The rapid increase of 4.9% ensured the greatest contribution to GDP growth in the third quarter as well: 3.1 percentage points. Private consumption is promoted by a rise in disposable income – the nominal net wage fund posts stable annual growth. Even though, in anticipation of the euro changeover, the population are depositing some of their cash currency savings with banks, some of these savings, as they are being spent more actively, stimulate consumption.

A drop in growth rate is observed this year for real goods and services exports: in the third quarter, it even slipped into minuses, contracting by 1.3%. Albeit the competitiveness of exporters remains high, the weak external demand has put a limit on export amounts. Exports suffered a further negative impact by the problems at Liepājas Metalurgs. In the summer months, export indicators were slightly improved by  Rīgas Kuģu būvētava, which exported several ships to Russia, and tourist visits in substantial numbers.  

The real goods and services imports have also dropped in the third quarter (by 1.4%), thus determining the positive contribution and compensating the negative exports in the GDP growth.  

A piece of positive news is increasing investments – the formation of fixed capital in the third quarter has increased by 3.0%. Judging by non-financial investment information, this rise has primarily taken place in the public sector – public buildings, road infrastructure, main pipelines etc.

By branch, the fastest growth was observed in construction (11.6%), art, entertainment and recreation (16.3%) as well as commercial services (10.5%). However, the proportionally large trade branch also contributed substantially to GDP annual growth (5.4%) as did the increase in product taxes (6.4%). The greatest negative contribution to the annual growth came from agriculture, forestry and fisheries branch as well as the power sector for which this year has been weaker in terms of performance than previous ones. A favourable development is the fact that as the base effect related to Liepājas metalurgs is gradually fading away, manufacturing has also returned as one of the growth engines.

Next year, GDP growth rate will remain at about 4%. Initially growth will be mostly determined by domestic demand, yet the role of exports will gradually increase again. As the economies of the European Union member states grow stronger, it can be expected that the demand for Latvian products will increase.  The main cause for worry as regards export potential could be weakening in Russia's economic growth, although our exporters have proved time and again that even in difficult circumstances they can increase their market shares. Investments will also play an important role in export growth and Latvia's joining the euro area could provide an additional stimulus here.