Flash comment: Latvia - November 30, 2016
GDP growth in 3Q 2016 meagre 0.3% YoY, weighed down by falling investments

In 3Q 2016 real GDP grew by only 0.3% compared to the year ago (up 0.2% against the second quarter of 2016, according to seasonally and working day adjusted data). The key reason for this poor data is the decrease in investment activity, which is mainly due to the delays in the EU structural funds inflows and to some extent also due to overall cautious investment confidence given the global uncertainty and slow global growth. Export sectors (except for transit, which is weighed down by Russia redirecting its trade flows to its own ports and thus shrinking its use if the Latvian infrastructure) are growing (overall up 2.4% YoY), household consumption (3.2%) and public consumption (1.6%) are growing, as are imports (0.6%). 

As to the industries, export industries such as manufacturing and ICT, commercial services and tourism are all expanding. Retail and wholesale, which reflects domestic consumer demand, is expanding. The decrease in activity is by and large contained within two sectors: construction (down massive 22% YoY, but confidence measures suggest that the worst is over as the EU funds are gradually about to flow in), and transport (cargo volumes down 7% YoY due to the above mentioned impact of Russia redirecting its trade flows). There are some spillovers to the labour market from the weakness in these two sectors and wage growth has slowed to 2-3% YoY in the third quarter, but with construction sector recovery underway, labour market will get a boost and wage growth will strengthen again towards 5% next year. 


With the EU funds administrative framework by now largely in place and the contracts gradually being signed, the lowest point seems to be passed and GDP growth should pick up from here. This year GDP is likely to grow by 1-1.5% (our forecast stands at 1.6%, and when more detailed 3Q data comes available we may shave it). Next year growth is expected to pick up to 2.6%, but this depends on the breadth of EU funds inflow and improved confidence of businesses to invest and households to keep consuming. With the rise in populism and numerous elections in the EU next year, which is likely to inch up uncertainty, it will be an uphill struggle to reach that growth forecast.

 For more information please contact Mr. Mārtiņš Kazāks, +371 67445859, martins.kazaks@swedbank.lv 


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