Flash comment: Latvia - GDP Q3 2019 flash
GDP growth to continue gradually slowing

According to the flash estimate, the quarterly real GDP growth slowed to 0.7% (seasonally and calendar adjusted) in the third quarter, which is still quite a decent growth. The annual growth accelerated from 1.8% in the second quarter to 2.8% (not seasonally and calendar adjusted) in the third quarter. However, the acceleration was driven by a greater number of working days this year. 

The main growth drivers in the third quarter were likely household consumption and exports. 

The household consumption growth is underpinned by growing purchasing power as average wage and pension growth exceeds inflation and by still solid consumer confidence. Nevertheless, the household consumption might have softened in the third quarter as signalled by slightly weaker retail sales growth. After a decline in the second quarter exports recovered in July-August (and probably also in September) amid rebounding grain exports. However, overall this year the exports have seen sluggish growth.  

In the first three quarters of this year the economy has expanded by 2.5% annually, which is almost two times slower than last year. 

The main reasons for weakening growth are softer investment growth and weaker export growth. Investment growth slowdown can be explained by slowing inflows of EU funds and weaker private investment amid elevated uncertainty and cautiousness. Weakness in exports is defined by softening economic growth in Latvia’s trade partner economies and a decline in wood and its article exports (significant share of overall exports) after an excellent performance last year (partly base effect). This can also be seen in the softening manufacturing growth throughout the year. 

Outlook: GDP growth is set to gradually slow towards 2% next year

The growth slowdown this year has been more pronounced than expected, hence we will most likely revise down our forecast of 2.8% for this year’s growth. Next year the growth is expected to moderate further to about 2% on the back of weaker consumption and investment. Labour market pressures show some first signs of easing and wage growth is set to moderate. Export growth will remain subdued. Slower growth at home and in trade partner economies, as well as still elevated global uncertainty will weigh on investment activity.

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

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