Latvia Government Consumption (ann. var. %)

Economy stalls in the fourth quarter

According to a preliminary reading, year-on-year GDP growth was flat in the fourth quarter, above the 0.6% contraction logged in the third quarter. Europe’s warmer-than-expected winter and state support helped the economy beat market expectations. Resilient household spending—with retail sales reaching the highest annual average growth since Q1 2022 in Q4—likely also drove the improvement. In addition, the downturn in the industrial sector softened from Q3’s average. Meanwhile, the external sector faced stronger headwinds, curbing merchandise exports growth.

On a seasonally adjusted quarter-on-quarter basis, GDP bounced back, increasing 0.3% in Q4 and contrasting the previous quarter’s 1.7% fall. Q4’s reading marked the best result since Q1 and helped the economy narrowly avoid a recession.

Looking ahead, the economy will likely contract in Q1 2023. With the highest inflation rate in the Eurozone in January, household budgets are likely under strain, while the recession in the industrial sector from H2 2022 should extend through the first quarter of 2023.

More positively, lower energy prices and an upgraded global economic outlook should prevent a deeper slump. Meanwhile, the prolongation of the Russia–Ukraine war looms over growth prospects via the loss of trade with Russia and Belarus.

Analysts at the EIU commented on the outlook:“Growth in 2023 will be negligible, as we expect the economy to experience a period of stagnation like in most European countries […]. High inflation will only abate slowly owing to high core inflation, even if spot energy prices fall, as firms pass through wage growth-driven costs. This will lead to a contraction in consumption demand in Latvia and abroad, weakening aggregate demand. In addition, with the ECB not showing signs of slowing down its monetary tightening course, loan-issuance costs will rise, leading to a contraction in investment in 2023.”