GDP growth in Latvia, at 5.6%, the fastest in Europe; growth to moderate this year

The indicator updated by the Central Statistical Bureau shows that gross domestic product (GDP) in the last quarter of 2012 grew 1.4% quarter-on-quarter (adjusted upwards by 0.1 percentage point). Year-on-year, GDP has grown by 5.1%. Since a broader perspective on GDP is currently available and previous data have also been adjusted slightly, we will look back at the year overall.

For a second consecutive year, the three fastest growing economies are in the Baltic countries, whereas in EU27 countries overall GDP even dropped – by 0.3% (these data are still going to be updated). The Latvian economy in 2012 continued to grow rapidly, at 5.6%. reaching the highest rate of growth in Europe. Only a year ago, we placed only third with this rate of growth.

Exports, investments and private consumption contributed equally to GDP growth in 2012, yet their particular dynamics changed over the year.   At the beginning, investments played a crucial role, later yielding to private consumption, but in the last six months net exports had a very important positive impact on GDP growth, accounting for an average of 4.4 percentage point contribution in GDP changes.

The gross value added in the economy increased by 5.2% in 2012. The greatest contribution to value added growth, in a breakdown by branch, was made by the increased value added in trade, manufacturing and construction. Yet in contrast to the previous year, other, more rapidly growing smaller branches accounted for a notable contribution (e.g., information and communication services, agriculture and professional, technical and scientific services).

In 2013, we do not expect GDP growth on the level of the last two years, yet it will still be among the highest in Europe. The base scenario of predictions published by the Bank of Latvia in January envisions a 3.6% growth. The data published soon after developing the predictions gave rise to speculations that the predictions would come to pass according to the optimistic scenario, yet the latest data point to several negative tendencies.

First, a rather rapid drop in production output was observed in manufacturing in January. In all likelihood, that was a brief moment of weakness, yet there are serious risks that are related both to further economic growth in the most important Latvian export markets and possible appreciation of producer costs because of the mandatory procurement component of electrical energy.

Second, the consumer and retail trade confidence indicators deteriorated sharply in February. The deterioration in consumer confidence is probably related to the colder winter and the attendant larger expenditure for heat. That in turn has a negative impact on the purchasing power of the population and reduces the possibilities of expenditure in points of sale. Retail trade is thus not doing as well as could be expected. The good news this year is that inflation remains low, so, as the expenditure related to the heating season is over, salary raises will determine a like improvement in purchasing power.  

Some problem spheres notwithstanding, we can have a rather optimistic future outlook; however, an important role in further economic growth will be played by investments as an important precondition for expanded production and improved productivity. And, even though euro introduction could be a positive stimulus here, a responsible economic policies in Latvia will still have the determining role in terms of attracting investment and creating jobs.