Latvia: Revised GDP estimates confirm robust growth in the first quarter
Latvia’s economy started 2018 on a strong note, according to detailed data released by the Statistical Institute on 31 May. GDP increased 4.2% in Q1 over the same quarter of the previous year, unchanged from the preliminary estimate, and also on par with the previous quarter’s 4.2% expansion. Growth was driven by fixed investment, which offset a notable deterioration in the external sector’s performance. In quarter-on-quarter terms, the economy bounced back to a 1.6% expansion on a seasonally-adjusted basis in Q1, following meager 0.4% growth in Q4 2017.
The expansion in Q1 was led by an impressive 19.4% annual jump in fixed investment (Q4 2017: +10.7% yoy), which came on the back of the country’s booming construction industry. Fixed investment has expanded at double-digit rates for five consecutive quarters, benefiting from an influx of EU structural and investment funding, which had been subdued before 2017. Meanwhile, private consumption rose 4.3% year-on-year. Despite decelerating from the previous quarter’s 5.5% expansion, private consumption continued to fuel economic activity amid the sustained tightening of labor market conditions. In addition, the deceleration was to a certain degree offset by a marked acceleration in government consumption growth (Q1: +4.7% yoy, Q4 2017: +3.3% yoy).
On the external front, Q1 marked the weakest quarter for exports since Q4 2015. Shipments of goods and services increased a modest 1.8% in annual terms, down from the previous quarter’s robust 6.4% expansion. The deceleration reflected an overall slowdown in foreign trade across the EU at the beginning of the year. Meanwhile, growth in imports of goods and services slowed only slightly in Q1, coming in at 6.4% yoy (Q4; +7.2% yoy), supported by higher fixed investment expansion. As a result, the external sector detracted 2.9 percentage points from the first quarter’s headline reading, a marked deterioration from the minus 0.6 percentage-point subtraction in the fourth quarter of last year.
The economy should expand robustly in 2018, albeit at a slower pace than in 2017, buttressed by healthy household consumption growth and booming investment activity. Nevertheless, recent concerns have emerged about the banking sector, and the further cooling of external demand has been weighing on the short- to medium-term outlook.