Latvia: GDP contracts at sharpest pace in over a decade in Q2 on Covid-19 hit
August 31, 2020
The economy shrank 8.9% year-on-year in the second quarter, according to detailed national accounts data released by Latvia’s Statistical Institute on 31 August. The contraction was smaller than the 9.8% downturn shown in the flash estimate but much greater than the first quarter’s 1.5% decline. Q2's outturn marked the worst result since Q1 2010.
The downturn reflected heavy contractions in both domestic and external demand. In particular, private consumption was pummeled as the measures enacted to curb the spread of Covid-19 decimated spending, with transport, cultural and recreational activities and the hospitality industry taking a significant hit. Consumer spending plummeted 20.9% on an annual basis in Q2, more severely than the 4.5% fall logged in Q1 and marking the sharpest contraction since current records began in 1996. In addition, fixed investment declined 6.1% year-on-year, swinging from the solid 5.7% increase recorded in Q1, while public expenditure moderated in Q2 (Q2: +1.7% yoy; Q1: +3.2% yoy).
On the external front, exports of goods and services plunged 12.5% (Q1: +3.2% yoy) amid shuttered demand from main trading partners, while imports collapsed 15.3% annually (Q1: +3.4% yoy) due to the slump in domestic demand.
On a seasonally-adjusted quarter-on-quarter basis, GDP fell 6.6% in Q2, following the previous quarter's 2.9% decrease.
The economy is expected to contract markedly this year due to the Covid-19 pandemic. The external sector will reel from a collapse in tourist arrivals and hampered intra-EU trade, while plunging fixed investment and constrained private consumption are set to dampen domestic demand. Higher public spending and increased EU funding should cushion the downturn somewhat, however.
Author: Javier Colato, Economist