Latvia: Economy exits recession
December 9, 2010
Recovery is gradually gaining momentum. According to revised numbers from 9 December, gross domestic product (GDP) expanded 2.9% annually in the third quarter, which was revised up from November's 2.7% growth estimate. The quarterly reading contrasted the 2.1% contraction observed in the second quarter and, in fact, represented the first annual expansion after nine consecutive quarters of contracting economic activity. The improvement in the third quarter was driven by positive developments in both domestic demand and the external sector. Private consumption expanded 2.5% year-on-year in the third quarter, which contrasted the 1.3% contraction registered in the second quarter. Gross fixed investment recovered from a 35.9% contraction in the second quarter, to a flat reading in the third. Furthermore, a favourable restocking of inventories contributed to the improvement in domestic demand. Simultaneously, the net contribution from the external sector improved notably over the second quarter, as exports recovered more markedly than imports. Exports of goods and services grew 15.5% in the third quarter, more than doubling the 7.5% increase registered in the second quarter, while imports accelerated from 10.0% expansion in the second quarter, to a 12.8% increase in the third. As a result, the net contribution from the external sector to overall growth improved from a 0.8 percentage-point detraction in the second quarter to a 2.1 percentage-point contribution in the third quarter. At the sector level the improvement over the second quarter reflected positive developments in the all three main sectors. Industry accelerated to the fastest clip in more than a decade, expanding 19.2% annually in the third quarter, up from the 14.3% increase tallied in the second quarter. Services posted the first annual expansion in the third quarter, after nine consecutive periods of contracting activity (Q2: -4.0% yoy; Q3: +0.8% yoy). Agriculture grew 1.4% annually, albeit at a slower pace (Q2: +6.8% yoy). A quarter-on-quarter comparison, confirms the improvement suggested by the annual figures, as GDP expanded 0.9% in the third quarter in seasonally adjusted terms. In its latest forecast statement, the Central Bank maintained its estimate of a 2.5% contraction for this year, while the Ministry of Finance expects the economy to contract 3.5% this year and to expand 3.3% in 2011.
Author: Ricardo Aceves, Senior Economist