Flash comment: Latvia - May 31, 2017
Latvia: GDP growth speeding up and broadening

• 1Q2017 reports fastest GDP growth since 2012

• Broad cyclical upswing with almost all sectors reporting solid growth

• Strong upside risks for GDP growth in 2017 to significantly exceed 3%

Latvian GDP expanded by 4% YoY (up 1.6% QoQ) in 1Q 2017, which is the fastest growth since 2012. By value added, all sectors but financial and insurance services (down 11.7% YoY, most likely due to the shrinking of the non-resident sector) report solid growth. The fastest growth is in exports sector with manufacturing up 10.3%, and transportation and storage up 9.4% as the negative impact from Russia shrinking its trade flows via Latvian ports (temporarily?) has been weaker than expected. The pace of income growth is picking up (gross wages up 7.2%), pushing up consumption (+5.5%). Investment recovery is rooting in with gross fixed capital formation growth climbing up to 8.8%. Rising investment activity pulls along construction recovery (up 8.4%) across all major construction segments. Overall, the past two quarters show economic growth speeding up, broadening and deepening with almost all sectors reporting positive growth numbers.

Outlook: strong growth to continue

The business cycle is clearly on the upswing. Following the investment weakness of the past few years, the speed of investment growth will further speed up pulling along construction; both expected this year to report annual gains well into double digits. Investment activity to be driven both by rising external demand and current already high capacity utilisation, as well as the surge of the EU funds inflows. Warming labour market is to keep pushing up wages and consumption. Annual growth rate of GDP over the remaining quarters of this year are expected to report somewhat lower numbers as they will have less working days than last year. Also, currently superb export growth rates (up 8.3%) are unlikely to be maintained while investment growth will pull up imports growth, thereby reducing net exports contribution. Overall, growth is strong and there are strong upside risks for GDP growth in 2017 to exceed our current forecast of 3% and thus we are likely to revise up our forecast when 2Q data comes out.

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


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