Latvia: Economy records sharpest contraction since Q1 2021 in Q2 2023
GDP contracted 0.5% year on year in the second quarter, following the 0.8% expansion recorded in the first quarter. Q2’s reading marked the worst reading since Q1 2021. That said, the second release was marginally better than the flash estimate of a 0.9% decline.
On the domestic front, the downturn was broad-based: Private consumption plunged at the steepest rate in over two years, contracting 1.2% in the second quarter (Q1: +0.2% yoy). Meanwhile, public spending growth moderated to 5.9% in Q2 (Q1: +6.9% yoy), and fixed investment growth more than halved to 5.1% in Q2 from 11.3% in the previous quarter.
Externally, exports of goods and services contracted 1.5% in Q2 (Q1: -0.8% yoy), marking the worst reading since Q2 2020 amid muted activity across the EU. In addition, imports of goods and services deteriorated, contracting 2.9% in Q2 (Q1: +2.9% yoy) and highlighting the loss of domestic momentum.
Meanwhile, on a seasonally adjusted quarter-on-quarter basis, GDP contracted 0.3% in Q2, contrasting the previous period’s 0.5% growth.
Looking ahead, our panel sees the economy rebounding in H2 2023 as pressure on consumers’ purchasing power lessens. Nevertheless, risks to the outlook are skewed to the downside due to subdued EU demand, still-elevated inflation and higher interest rates. The country’s unfolding political crisis, additional spillovers from the war in Ukraine and a weaker-than-expected European economy pose downside risks to the outlook.