15.06.2022.

Storm before the calm: the high economic activity during the first quarter

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With the pandemic-related restrictions losing their grip, the economic activity has enjoyed a significant growth during the first quarter. Russia's invasion of Ukraine has also created more bustle by encouraging purchases of raw materials, components and finished products for fear of their availability and price in the future. Not to mention the support measures for Ukraine and war refugees that have also bolstered spending. 

The situations of high uncertainty are mostly dominated by a desire to create a safety net, limit spending and postpone investment plans; nevertheless, this time the manifestations are rather opposite. This, however, does not imply that such high activity will be a long-term situation; steep price increases will, most likely, impede both domestic and foreign demand already in the second half of the year. 

Private consumption was the main driving force during the first quarter. Along with easing of the pandemic-related restrictions, the availability of shops and various services contributed to the spending rise. Expenses were also increased by activities supporting Ukraine and war refugees. Still, the situation is not uniform, the population is stuck between a rock and a hard place in their decision making: to spend the savings curbed by inflation or to save more due to precaution? Nevertheless, the backdrop of the war and the effect of prices on solvency raise concerns about the future. The answer "I spend the savings built during the crisis" is becoming increasingly popular within the Omnibus survey conducted by SIA Latvijas Fakti and commissioned by Latvijas Banka. At the same time, the answer "I'm going to build additional precautionary savings" remains the most popular one. European Commission data also show that consumer sentiment deteriorated significantly in March and May. And this will cause consequences; if not today, then tomorrow.
 

What is the state of play with your savings during this crisis?

 

Source: SIA Latvijas Fakti, Omnibus survey by Latvijas Banka.

2022 will, most likely, not see a sharp rise in investment owing to the ever-growing construction costs. Although quite recently potential overheating of the construction sector was a topical issue in 2022 when significant public-sector investment was expected in construction. For the time being, this sector only experiences a sharp rise in costs. The growth rate in the first quarter is, however, relatively high but only in comparison with the snowy fourth quarter of 2021 unfavourable to construction.

The export turnover of goods and services grew mainly due to the price increase, with the actual volumes rising moderately. A more buoyant growth was observed in relation to services that also became more available abroad, as the pandemic-related restrictions were eased.

Real imports of goods and services witnessed a steep rise in 2021; it was provoked by building reserves owing to the supply chain disruptions during the pandemic. The flow of imports did not lose momentum in the first quarter either as upon Russia's invasion of Ukraine the supply chain disruptions were expected to escalate, thus producers rushed to restock the shelves of the warehouses which were already full of raw materials.
The high bar set by the gross domestic product for the first quarter calls for a revision of forecasts that, despite the backdrop of the war and deteriorated outlook for the second half of the year, will require an upward revision for 2022. More information on the forecasts and the factors behind their revision is awailabe on macroeconomics.lv.

APA: Rutkovska, A. (2022, 08. dec.). Storm before the calm: the high economic activity during the first quarter . Taken from https://www.macroeconomics.lv/node/5612
MLA: Rutkovska, Agnese. "Storm before the calm: the high economic activity during the first quarter " www.macroeconomics.lv. Tīmeklis. 08.12.2022. <https://www.macroeconomics.lv/node/5612>.

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