Latvia: Economic growth moderates in Q1
GDP growth waned to 0.8% year on year in the first quarter from 1.2% in the fourth quarter of last year. The moderation came on the back of downbeat household spending growth and deteriorating exports.
On the domestic front, private consumption growth drove the GDP deceleration, slowing to 0.4% in the first quarter, well below the fourth quarter’s 6.3% expansion. This outweighed improving performances in other sectors: Public spending sped up to a 6.9% expansion in Q1 (Q4 2022: +5.1% yoy). Meanwhile, fixed investment growth improved to 11.3% in Q1 from the 0.1% expansion recorded in the prior quarter.
The external sector performed poorly against a backdrop of weakening activity across the EU. Exports of goods and services contracted 0.7% in Q1, marking the worst result since Q1 2021 (Q4 2022: +3.1% yoy). In addition, imports of goods and services growth slowed to 3.1% in Q1 (Q4 2022: +9.8% yoy).
On a seasonally adjusted quarter-on-quarter basis, economic growth slowed notably to 0.6% in Q1 from the previous period’s 1.2% increase.
Looking ahead, our panel sees the economy swinging into contraction in Q2 2023, before rebounding in the following quarters. Muted EU demand and the loss of trade with Russia and Belarus will weigh on exports, while above-target inflation, higher interest rates and dampened consumer confidence will weigh on spending and investment. Additional spillovers from the war in Ukraine and a weaker-than-expected European economy pose downside risks to the outlook.
Analysts at the EIU commented on the outlook:
“The economy has entered a period of stagnation similar to most European countries. High inflation will only abate slowly, as firms pass through high wage and input costs to consumers, despite continuously falling energy prices. This is weighing on domestic demand and retail sales. In addition, with the ECB remaining hawkish regarding its continued monetary tightening course, borrowing costs will rise, leading to a contraction in investment in 2023. Government consumption will slow in 2023 despite the implementation of EU investment programs and the start of the construction of the Rail Baltica project, owing to a more difficult financing environment.”