Flash comment: Latvia - January 30, 2017
The economic growth is gaining pace in Latvia

• GDP growth in the Q4 accelerated to 2.1% (yoy, nsa), 1.6% for the whole year 

• The low point is past, growth will speed up close to 3% in 2017 

• Structural reforms can ensure more rapid and sustainable growth 

According to the flash estimate of the Central Statistics Office, Latvia’s GDP grew by 2.1% (not seasonally adjusted) in the fourth quarter of 2016 compared to the same period a year earlier. 1.6% growth was recorded for the whole year - in line with our forecast. The end of the year data indicated an improvement in manufacturing, export and retail trade performance. Even though the construction sector was still in recession, it has started to recede slowly. We saw some improvement also in the construction and industrial trade confidence. The fourth quarter data show that the low point (the weak Q3) is past, and the economic growth is gaining pace.

 

Outlook for this year: economic growth close to 3%, but Latvia can do better 

This year more rapid implementation of the EU funds projects will facilitate investment growth, which will speed up economic growth. We expect that the real GDP growth will be close to 3%. Investment activity will improve substantially and move construction back to growth facilitating job creation. The growth outlook in Europe has improved, and stronger external demand will contribute to export growth. However, the risks are still there and can hamper economic growth. The main risks are external – effects of the Brexit vote and the Trump victory, as well as upcoming European elections. There are also domestic risks. At the end of last year the consumer confidence slumped, possibly affected by unsuccessful communication of changes in certain taxes. The poor confidence can result in weaker consumption at the beginning of this year. So it is important that in spring, when the tax policy debate starts, the government not only focuses on designing a better tax system, but also on communicating the tax changes in a timely manner to the society. 

The economic growth is gaining pace, but we should not fall in the trap of complacency. Close to 3% growth is not sufficient for Latvia, and it considerably lags behind the famous 5% objective, which seems unrealistic given the current structural policy and external environment. We do not have any new recipes – only implementation of the well-known structural reforms can help to achieve a sustainable and rapid growth.


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

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