Flash comment: Latvia - February 28, 2018
GDP growth fastest in six years

The fourth quarter GDP growth was confirmed at 4.2% year-on-year (0.3% quarter-on-quarter). For the year as a whole, the real GDP expanded by 4.5%, which is the fastest pace in the past six years. Moreover, in terms of GDP volume the economy finally surpassed its pre-crisis peak. Compared to 2007, both the economic growth and the structure of the economy are more balanced, and we do not see general economy overheating. The growth is broad driven by exports, investment and consumption.

Last year all sectors, except finance and insurance sector, increased their value-added. The finance and insurance sector’s value-added fell by close to 17% on the back of shrinking non-resident segment and a negative base effect from 2016 (one-off sale of VISA Europe shares in 2016 boosted banks’ profits and the finance sector’s value added). Construction was the fastest growing sector (+19% in real terms). It rebounded from the preceding year’s downturn, benefitting from increased demand as more EU funds and private sector’s infrastructure and real estate projects were launched. These projects together with national air carrier’s purchase of new airplanes contributed to increased investment activity (+16%). Manufacturing (+8%), transport (+7%) and domestic trade (+5%) sectors significantly contributed to economic growth. Despite robust export performance, domestic demand was the key driver of growth in 2017.

This year has started with troubles in the financial sector, causing serious reputation damage to the country. However, currently the impact on the economy and the state budget looks minor. If we look at the numbers, then we might have to take a few decimals off the latest Swedbank GDP forecast for 2018 (4.2%), taking it slightly below 4% - still a rather strong growth. The decline of non-resident deposits will negatively affect the finance and insurance sector’s contribution to the economic growth. Several construction projects might be cancelled, and the number of unemployed could slightly increase but given tightening labour market this increase will be temporary. The impact on investor sentiment and new foreign investment inflow will depend on how well Latvian authorities deal with the challenges in the financial sector. The largest rating agencies have said that they are not planning to reduce sovereign ratings, which means that the debt refinancing costs should not significantly increase.

Currently, it seems that the rest of the economy is strong enough to absorb the decline in the finance and insurance sector (similarly as last year). The growth in trade partner economies will remain solid, creating opportunities for exporters. Manufacturing will benefit both from growing external and internal demand. EU funds projects and the already high capacity utilization will drive investment and construction volumes. Consumption and domestic trade volumes will benefit from growing household income. January retail sales volumes show a strong start to the year.

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


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