Several reasons for the annual growth of the Gross Domestic Product

The Central Statistical Agency's (CSP) updated indicator regarding the third quarter of 2010 points to a growth, for the first time since the beginning of the recession also annually, increasing 2.9% year-on-year. The increase was determined not only by the lower base of the previous year but also by the small yet persistent growth for a third consecutive quarter. As estimated by the Bank of Latvia, the GDP growth is already at 3.1% compared to the lowest point in the fourth quarter of 2009.  With each passing quarter, as the data are updated and seasonally adjusted, the quarterly rate has been corrected upward, thus improving the annual performance as well. It can now be estimated that in 2010 the gross domestic product will amount to 12.6 billion lats, i.e. approximately 5.7 thousand lats per capita.

The annual rise in real exports of goods and services, currently the main economic driver, keeps going up reaching 15.5% in the third quarter. This has been fostered both by the regained competitiveness in manufacturing and improvement in foreign demand.

Even though foreign demand is growing at a significantly faster rate, a change in the dynamic of domestic demand is also becoming obvious:

• In the third quarter, the largest component of domestic demand - private consumption - posted its first quarter-on-quarter rise (by 2.5%). The positive impulses of this growth can be found both in the indicator of consumers' mood, which has been improving since the beginning of the year, and in the drop in unemployment and gradual rise of the number of the employed.
• A real Christmas surprise has been presented by investments, which have remained unchanged year-on-year: this after the 36% annual drop observed as late as the previous quarter. The improvement is very significant and cannot be attributed only to the base effect.
• The positive contribution of changes in stocks has dropped rapidly amounting to a mere 0.9 percentage points (11.2 percentage points in the previous quarter). Stocks characterize the difference between supply and demand, i.e. the produced and imported and consumed and exported. Apparently the tendency to replenish the stocks of goods that had dwindled during the crisis has played out, and from now on the role of stocks will not contribute in such significant ways to GDP growth, which will depend more on the dynamics in exports, consumption and investments in fixed assets.
• The improved domestic demand and bringing in raw materials necessary for manufacturing were behind the high annual rise in imports (by 12.8%), yet exports have grown more rapidly and year-on-year exports exceed imports by 0.7 percentage points.

Among the industries, the manufacturing industry, which is an important contributor to the success in the foreign markets, still posts the most rapid growth, thus ensuring the greatest positive contribution in the GDP dynamic (2 percentage points). Trade is a close second, posting significant growth after a very rapid downslide. The contribution of transport and communications to GDP growth is likewise large: carriage of goods by road and passenger turnover in the main kinds of transportation as well as business at the Riga Airport all grew rapidly. The drop in construction, on the other hand, slowed substantially.

In the next few quarters, global developments will have an important effect on the Latvian economy. Taken as a whole, neither the situation, nor the course of the public discussions regarding it increases confidence in stable foreign demand. The development of the Latvian economy in the middle term is also subject to several important domestic risks.

• The capacities of enterprises oriented toward domestic demand may still be rather free whereas the capacity of many exporting businesses has already been exhausted. Despite the good export indicators, the attraction of new investments could be limited both by financial factors and uncertainty regarding future development. Even though the latest investment data show much improvement, worry about the stability of these changes and their distribution - i.e. whether the improvement can really be attributed to investments promoting further development of production - remains.
• Employment is rising gradually, yet the presence of a variety of structural risks is felt ever more acutely: the lack of adequately qualified employees, the high and persistent level of prolonged unemployment, the ever more pronounced regional disproportions etc. Therefore some thought must be given to the implementation of national employment programmes in ways that would meet the demands of the market and be more goal-oriented.
• Since the draft budget for 2011 holds no promise for improving the competitiveness of enterprises, the ability to continue with the reforms in state functions and education as well as further work on measures to reduce shady economy so as to return to tax cuts as soon as possible and thus stimulate production will be decisive in terms of resuming growth.