Flash comment: Latvia - February 28, 2017
The lowest point is past – this year the growth will accelerate

According to the revised data of the Central Statistical Bureau of Latvia, GDP growth was +2%. As expected, investment has undergone the largest revision: even though the gross fixed capital formation declined by about 11% last year, it is much less than the 25% fall announced earlier.

Even though the numbers have slightly changed, the story has not. The lowest point in the economy is past. As the data for several sectors have already shown (e.g., export growth has accelerated), the end of the previous year was much better. After growing by only 0.5% in the third quarter, the year-on-year GDP growth accelerated to 2.6% in the fourth quarter. Across sectors, export sectors – manufacturing and tourism – achieved the most rapid growth (+5.6% and +8.9%, respectively). Domestic trade registered a robust 3.3% growth as household income increased and households continued to cautiously increase their spending. Construction was the only sector that declined. It fell by dramatic 18%. The worst in construction is over. The construction confidence and investment data for the end of the year indicate that the sector may have even returned to small growth.

Outlook

This year the GDP growth will be around 3%. However, if the EU funds inflow is indeed timely and boosts the business confidence and credit demand, the growth could be higher. The EU funds inflow and not so much the number of opened programs and signed contracts (where Latvia is doing quite well), but the amount of tangible activity that is carried out (not too much so far) remains the critical point. If the EU structural funds inflow lags, this year will still be quite sluggish. Such scenario will result in much greater level of anxiety in 2018 in order to comply with the timeframe of the EU funds… Then construction costs will surge, allowing to build less than it would have been possible in 2017.


For more information please contact Mr. Mārtiņš Kazāks, +371 67445859, martins.kazaks@swedbank.lv

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