Latvia: Q3 GDP expands less than previously reported
November 30, 2016
In Q3, Latvia’s GDP increased just 0.3% over the same period last year, according to a revised set of data released by the Statistical Institute on 30 November. The increase was revised down from the initial flash estimate that saw the economy growing 0.8%. Q3’s result marked the slowest increase in six years and a substantial deceleration compared to the 2.0% year-on-year expansion in Q2. Sequential data was also discouraging as GDP increased a seasonally-adjusted 0.2% in Q3, which came in below a 0.5% expansion in Q2. Q3’s final result was also revised down from a preliminary 0.5% increase.
Looking at the GDP components, investment was the main driver behind the quarterly deceleration. Gross fixed investment plummeted 26.4% annually in Q3, which followed an equally dismal 26.3% plunge in Q2. The result marks the sharpest contraction in over six years and continued to reflect a severe disruption to inflows of EU funds following the 2015 deadline to draw down funds from the 2007–2013 fiscal period, with projects financed under the 2014–2020 period not yet under way. Meanwhile, growth in private consumption fell from 4.1% in Q2 to 3.2% in Q3, whereas government consumption increased 1.6% in Q3, up from a flat growth rate in Q2.
On the external front, exports of goods and services increased for a second consecutive period, showing a solid 2.4% expansion in Q3 (Q1: +3.9% year-on-year). Due to weaker domestic demand, imports decelerated notably and increased just 0.6% in Q3, which came in well below the 7.5% rise in Q2. As a result, net exports provided some support to overall economic growth, contributing to it by 1.0 percentage points in Q3, which contrasted the 2.2 detraction recorded in Q2.
Linda Vildanova, Economist at Swedbank, comments on what is behind their downward revision to this year’s forecast:
“We have revised down our GDP forecast for 2016 to 1.6% (2.1% previously). The main reason is very weak growth in Q3 due to crisis in construction triggered by delay of EU funds inflow and subdued business (and consumer) confidence. In Q3 GDP grew by 0.8% yoy only. Crisis in construction deepened in Q3 - construction output shrank by 22% compared to 19% decrease in H1 2016. Also, recent global events (e.g., Trump winning the elections) add to uncertainty which negatively affects business confidence to invest. Thus, we revise down gross fixed capital formation forecast to -11% for 2016, which suppresses overall GDP growth.”
Author: Ricardo Aceves, Senior Economist