GDP rate of growth up in the third quarter

The flash estimate has confirmed the economic “breakthrough” evident in the operational data. In the third quarter, GDP has increased 1.7% quarter-on-quarter (seasonally adjusted data at constant prices). The rapid quarterly growth has also ensured a decent annual growth rate, i.e. 5.3%.

During the summer, even the greatest optimists had no visions of such rapid growth. Why not? Global economic problems and woes of Southern European countries have been a topic of discussion for the last couple of years, yet the Latvian economy resisted any downturn, ensuring ever more rapid GDP growth rate and gradually outperforming Estonia as the leader of European Union’s (EU) growth champion. Among the most important factors in helping Latvia’s good economic performance was the relatively successful economic development of its main trade partners, thus maintaining a high external demand. Yet this year, it was Germany, the European heavyweight, which began to post a rapid decline in population and business confidence – as of the beginning of the year and up to October Germany’s total Economic Sentiment Index (ESI) has lost 13.3 point (which is a lot), thus suggesting nothing encouraging in terms of demand for Latvian produced goods. Up to now, however, other countries important to our exports, Estonia, Lithuania and Sweden, have maintained a relatively good position.

In the second quarter, private consumption, which had taken a lengthy break, reminded us of its role. The rapid growth of private consumption was the greatest contributor to GDP growth. It is worth remembering that the last time consumption played a leading role almost five years ago, in the third quarter of 2007. Albeit we do not yet see the components that make up the third quarter GDP, the very rapid retail growth points to the likelihood that private consumption may have retained its leading role in this quarter as well.

In breakdown by branch, good performance has been posted also by agriculture, manufacturing and construction. According to what was said in the press commentary by the Central Statistical Department (CSD), growth was likewise posted by practically all branches of the service sector. A more detailed evaluation of the branches will have to wait until next month when CSD will publish the adjusted GDP data with more particulars.

What can be expected in the fourth quarter? It is not likely that the picture will stay as pleasant as it is now.

First, the results of the fourth quarter will be more significantly affected by weather conditions and the heating season, which may dampen growth. Let us remember that last year the fourth quarter was very warm, thus allowing construction and transportation branches to prolong seasonal work and bringing down heating bills for the population and thus providing them with the opportunity to use their money for other purchases. It is less than likely that the end of this year will be as warm as last year.

Second and this is potentially much more important, growth at the end of this year and also next year could be impacted by developments both in external demand and the dynamics of domestic demand which has been the main driver in recent quarters.  The operational data for September already signalled drops in retail trade and industry. While that could be considered a short-lived fluctuation, it is a fact that some sub-branches of manufacturing that posted vigorous growth before have begun to slow down. In retail, there has been a drop in consumer goods, which may point to weakening consumption.

Thus a certain slowdown in growth rate in the last quarter of the year is very likely. Yet there is no reason for excessive pessimism – even with a slower growth rate, Latvia has a good chance to remain among the fastest growing EU countries.