Investment in Latvia

Latvia - Investment

Growth sinks to an over two-year low in Q1

A second reading of national accounts data revealed that the economy grew at a slightly faster pace than previously estimated in the first quarter of the year. Nevertheless, although revised up from 2.8% to 3.0%, year-on-year growth still decelerated significantly in Q1 2019 (Q4 2018: +5.1% year-on-year) and marked the weakest expansion since Q4 2016.

Meanwhile, in seasonally- and working-day adjusted quarter-on-quarter terms, the economy contracted 0.1% in Q1 (previously reported: -0.3% quarter-on-quarter). The result marked the first contraction in output in over three years and contrasted the 0.9% expansion recorded in Q4 2018.

A marked downturn in domestic demand metrics led the deceleration. Household consumption rose 3.0% year-on-year in the quarter, the softest reading in nearly two years and down from the previous quarter’s 3.9% increase. In a similar fashion, government spending growth decelerated to a three-year low (Q1: +2.4% yoy; Q4: +4.2%), while fixed investment growth more than halved (Q1 2019: +8.0% yoy; Q4 2018: +18.6% yoy); that said, fixed investment remained relatively upbeat thanks to buoyant investment in machinery and equipment, intellectual property products and dwellings, and other buildings and structures.

The external sector, meanwhile, strengthened notably. Exports rebounded in the first quarter (Q1 2019: +3.6% yoy; Q4 2018: -0.5% yoy), propelled by solid merchandise exports growth. Meanwhile, imports contracted at the sharpest rate since Q4 2014 (Q1: -0.8% yoy; Q4 2018: +3.8% yoy) on tumbling services imports. As a result, the external sector added 2.6 percentage points to growth in the first quarter, after subtracting 2.9 percentage points from growth in Q4.

The Central Bank forecasts growth of 3.5% in 2019 and 3.1% in 2020. FocusEconomics panelists also expect GDP to increase 3.6% in 2019, which is up 0.1 percentage points from last month’s forecast, and 3.2% in 2020.