Flash comment: Latvia - February 28, 2019
Annual GDP growth was 4.8% in 2018

Annual GDP growth in Latvia was 4.8% in 2018. It was a tad stronger than in 2017, the fastest growth in seven years and the fastest growth among the Baltic countries in 2018. It means that income convergence with the neighbours as well as other EU countries continues. Economic growth remained broad with almost all industries showing growth. Also, product taxes grew strongly last year, accelerating GDP growth.  

Construction was a top performer among industries in value added growth. EU funds inflow and other public and private investment supported investment in dwellings, other buildings and civil engineering. Construction value added growth decelerated in the second half of 2018 and this trend will continue this year as labour shortages and capacity constraints become more acute as well as EU fund inflow grows in a slower manner. With slower construction growth investment growth will moderate as well. 

The second fastest growing industry was information and communication services, which also suffers from labour shortage. Thus, it will be increasingly hard to maintain double-digit growth rates exhibited currently. Strong growth in transport sector in 2018 will also be hard to maintain this year due to slowing global growth and Russia’s cargo transfer to its own ports. 

Meanwhile growth in the two biggest industries – trade and manufacturing – slowed already in 2018, thus we expect that similar growth rates as in 2018 will persist this year as well. Falling unemployment and labour shortages will keep wage growth elevated, supporting household consumption, retail and service providers. Manufacturers keep investing in automatization and have been able to increase sales volumes even when global growth slows. Labour cost growth will push company profitability down in all industries but for now companies have been able to hold both export market shares and profitability. 

Considering constraints and slowing global growth, we expect economic growth to slow closer to 3%. Uncertainty globally, however, is rather high, risks are plentiful, and growth can slow even more. For now, Latvian economy has endured well in times of global turbulence.

 For more information please contact Ms. Lija Strašuna, +371 67445844, lija.strasuna@swedbank.lv 

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