Latvia Imports (G&S, ann. var. %)

Economy improves in the fourth quarter

GDP growth picked up to 0.3% year on year in the fourth quarter from 0.2% in the third quarter. This marked the best result in the Baltic area in the final quarter of 2022.

The expansion was supported by resilient domestic spending. Private consumption growth sped up to 6.3% year on year in Q4 from a 3.9% expansion in Q3. Moreover, government spending sped up to a 5.1% increase in Q4 (Q3: +2.6% yoy). Less positively, fixed investment growth ebbed to 0.2% in Q4, from 0.3% recorded in the prior quarter.

Meanwhile, the external sector struggled amid Europe’s slowdown. Exports of goods and services growth fell to 2.9% in Q4, marking the lowest result since Q1 2021 (Q3: +11.4% yoy). Conversely, imports of goods and services growth sped up to 9.5% in Q4, further pointing to firming domestic demand (Q3: +9.1% yoy).

Accordingly, on a seasonally adjusted quarter-on-quarter basis, GDP was stable in Q4, improving from the previous quarter’s 1.0% contraction.

Looking ahead, the economy will be facing turbulent conditions in the first half of 2023. Ebbing EU demand and the loss of trade with Russia and Belarus will weigh on the performance of the external sector. Furthermore, double-digit inflation, tighter financing conditions and stubborn economic pessimism will strain household budgets and erode investment. Further spillovers from the war in Ukraine, a resurgence in price pressures and a weaker-for-longer European economy pose risks to the outlook.

Agnese Buceniece and Laimdota Komare, economists at Swedbank, commented on the outlook:

“The first half of the year will remain downbeat, followed by a gradual recovery. Retreating inflation and the end of the expensive heating season should help improve private consumption. The export outlook will also start to recover as external demand picks up later in the year, but there are concerns about competitiveness.”