Rapid GDP growth like in spring, with moderation to follow

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Although the beginning of 2018 saw accelerated economic development, the overall annual growth is likely to be slower than in 2017. It can be explained by the relatively high base achieved last year, declining optimism in the external environment and some local "speed bumps", i.e. financial sector turbulences on the domestic market.

According to the flash estimate of the Central Statistical Bureau (CSB), in the first quarter of 2018 GDP rose by 1.7% quarter-on-quarter (at constant prices, seasonally adjusted data). Annual GDP growth rate stood at 4.3% as per non-adjusted data and 5.2% as per the time series of calendar adjusted data.

The contribution of the rapidly growing construction sector to GDP was impressive on account of further development of private projects and those related to EU funds. Compared to the previous year, the sector growth has surged by 35%.

The accelerated growth rate was also supported by a 3% increase in industry. In the first two months of 2018, strong growth persisted in output and turnover in manufacturing, both in exports and on the domestic market; the sector's contribution to GDP growth has most likely been positive. As the weather was cold in the first quarter of the year, electricity produced by co-generation plants exceeded the level of the corresponding period of 2017 by almost one fifth. Consequently, it seems the energy sector was also successful in the first quarter.

Against the backdrop of wages and salaries on the rise and inflation remaining relatively moderate, the trade sector must also have been one of the major supporting factors to GDP growth, with retail trade turnover expanding by 5%.

As to the financial sector, where the value added had posted a sharp decline already in the previous year, serious changes have been observed this year as well; according to forecasts, the fall in value added will persist.

Data on development in the euro area, published at the beginning of the year, were less attractive than throughout 2017. Analyst forecasts with respect to monthly data collected in our trade partners, e.g. Purchasing Managers' Indices, confidence indicators, as well as industrial and retail data, have mostly turned out to be over-optimistic. Consequently, it is no wonder that the GDP flash estimate for the first quarter in France and the euro area overall, as well as in the UK suggests slower growth than in previous quarters.

Nevertheless, it should be kept in mind that Purchasing Managers' Indices and confidence indicators had reached extremely high levels that could not be sustained in the long term and, despite the drop at the beginning of the year, they still point to solid growth. Moreover, in Germany, the largest euro area economy, the results of the first quarter were affected by several one-off factors, e.g. the flu epidemic and strikes. The available euro area indicators for April point to stabilisation of the situation. Of late, however, the global trade activity, so important for the development of the exporting euro area, has been increasingly threatened by trade wars and sanctions. Latvia's small and open economy is very much dependent on the successes and failures of the euro area; let us hope that robust growth will persist in the euro area.

The GDP flash estimate is based on preliminary statistical information of selected sectors, i.e. industry, construction and trade, as well as taxes on products. A more accurate and elaborate GDP assessment will be published on 31 May providing a more in-depth insight into the factors behind the GDP growth.

APA: Zorgenfreija, L. (2019, 17. oct.). Rapid GDP growth like in spring, with moderation to follow. Taken from https://www.macroeconomics.lv/node/4124
MLA: Zorgenfreija, Līva. "Rapid GDP growth like in spring, with moderation to follow" www.macroeconomics.lv. Tīmeklis. 17.10.2019. <https://www.macroeconomics.lv/node/4124>.

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