Flash comment: Latvia - July 31, 2017
Latvia’s economic growth in the first half of 2017 twice as fast as last year

GDP growth in Latvia accelerated to 4.1% YoY in the second quarter (+4.0% YoY in the Q1) of 2017. Seasonally and calendar adjusted growth was even more impressive, i.e. 4.8%, as there were two working days less this year. Quarterly growth slightly slowed from 1.6% in the first quarter to 1.3% in the second quarter.

Household consumption was likely the main driver of growth. Household income growth continued to exceed inflation, as falling unemployment kept exerting upward pressure on wages. Households spent more, as retail sales volume growth accelerated (+3.3% YoY) and the value added growth of service sectors remained stable (about 3%). Although household confidence improved in the second quarter, households remained cautious in their spending as household deposits in banks increased by about 8% YoY.

The second quarter was quite good for businesses, which can be seen in good/improving business sentiment. After the strong first quarter export growth in April-May slowed only slightly and remained solid (+8.2% YoY in current prices). Growing external demand facilitated manufacturing output growth (+7.9% YoY in April-May, calendar adjusted data). The construction sector continued to recover (+14% YoY) after the poor performance last year. Investment activity most likely continued speeding up on the back of base effects and a slight acceleration in EU funds projects implementation.

Outlook

Solid growth in the largest trade partner economies will boost export and manufacturing also in the second half of the year, but perhaps at a slightly slower rate. Labour market tightening will continue moving wages higher, and income growth will exceed inflation, positively affecting the household consumption. The investment activity is likely to show its fastest growth in the second part of the year, as the expected EU funds inflows are concentrated towards the end of the year. However, increasing investment will be accompanied by higher imports, dragging on the GDP growth. Given the strong start to this year and the optimistic expectations for the second half, the GDP growth may come in well above 3.5%.


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

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