Flash comment: Latvia - November 30, 2017
GDP growth at the top speed of the cycle

The real GDP growth was confirmed at 5.8% YoY (nsa) – the fastest growth since 2012! Most likely, it is the fastest pace of growth within this business cycle. The quarterly growth was at 1.5% (swda). The size of the economy is close to the pre-crisis level, most likely finally surpassing it at the end of this year – 10 years after the start of the recession.

Similarly to the first half of this year, the economic expansion in the third quarter was broad, with growth seen in almost all sectors. The only exceptions were agriculture and finance sectors. The value added in the agriculture sector fell (-3% in real terms) as heavy August and September rainfalls drowned crops, while the still-shrinking non-resident segment dragged on the value added in the finance sector (-12% in real terms). The largest contributors to the GDP growth were construction (+25%), transport (+10%), and manufacturing (+8%).

In the third quarter, the internal demand – both household consumption and investment, was the main driver of growth, with contribution from exports becoming smaller. The labour market tightening induced a rapid wage growth, which exceeded inflation and resulted in improving household confidence and a solid purchasing power growth, boosting consumption. The investment activity was supported by the already-high capacity utilization and increased EU funds inflows that were pulling along the construction sector. A rebound in internal demand facilitated more rapid import growth, limiting the GDP growth. The export growth remained strong despite slightly slowing, supporting manufacturing and transport (driven by road transport services) sectors, with the former benefitting also from the growing internal demand.

Outlook – economic growth to remain strong but slower

Improving economic sentiment signals continuation of solid growth, going forward. Exports will still be driven by strong external demand. Although the fastest pace of export growth is most likely already behind us, it will still contribute to the GDP growth. However, the role of investment and household consumption will increase. As the base effect fades, the economic growth in the fourth quarter will slow but remain rather steep – about 5%. We expect the real GDP growth at 4.7% for this year as a whole and 4.2% next year.

For more information please contact Ms. Agnese Buceniece, +371 67445875, agnese.buceniece@swedbank.lv 


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