According to the data published by Central Statistical Bureau of Latvia, GDP, in the first three quarters of 2018, in comparison with the corresponding period last year, has increased by 4.7%. However, when compared with the 2nd quarter of 2018, GDP, as reported by seasonal and calendar adjustment, has grown by 1.7 %, which, in fact, has been the fastest quarterly growth rate since the end of 2016. Overall, in January-September 2018, GDP has increased by 4.7%, which, in turn, means that in the first three quarters of 2018 the fastest economic growth rate in the last seven years has been achieved.
A flash estimate of GDP in the 3rd quarter a month ago indicated that the economic growth rates have increased mainly due to developments in the service sector. The volumes of ICT services recently have been growing rapidly. In the 3rd quarter of 2018, the volumes increased by 13.7%. In the last months, the observed increase in freight traffic by road and cargo loaded and unloaded at ports in an indicator of high performance in transport sector. In the 3rd quarter, transportation and storage grew by 8.2%. The high growth rate in forestry (27% in the 3rd quarter), which was mainly influenced by both high demand for raw materials and more favourable weather conditions than in fall 2017.
Taking into account the base effect, the slower growth rates in the 3rd quarter in construction can be observed. If during the first half of the year the growth in construction sector exceeded 30 %, then in the 3rd quarter the volumes have increased by 10 %. However, monthly statistics on retail trade turnover and manufacturing output already revealed that these sectors will have relatively weaker performance in the 3rd quarter of 2018. Thus, retail and manufacturing in the 3rd quarter grew by only 2% and 0.8%, respectively. The relatively slow development of industry was mainly affected by a decline in the production in food industry. Also, the manufacture of electrical equipment, after an annual growth rate of 30% in the previous years, the production volumes remain constant.
Domestic demand continues to steadily increase. The growth in private consumption is stimulated by improvements in the labour market and rising wages. In the 3rd quarter of 2018 private consumption has increased by 4.7%. However, from the expenditure point of view the largest contribution to GDP growth was the gross fixed capital formation – investments were by 13.2% larger than a year ago. The increase was largely influenced by investments in machinery and equipment (by 15%) and intangible assets (by 27%), which are significant factors in strengthening the competitiveness of the Latvian economy.
However, the exports of goods and services in the 3rd quarter increased just by 1%, in comparison with the corresponding period last year. The overall increase in export volumes was mainly driven by a rise in exports of goods (mostly exports of wood and its products). A relatively rapid growth of export volumes in the production of iron and steel, machinery and equipment, and the manufacture of transport equipment was observed. At the same time, the export volumes in food industry, agriculture, and light industry declined. However, exports to Sweden and the United Kingdom have increased significantly.
Overall, it is anticipated that the economic growth in 2018 will be similar as in 2017, slightly exceeding GDP growth rate of 4.5%. Next year, however, GDP growth rate most likely will be between 3.2% and 3.5%. Growth will mainly be affected by the growing uncertainty in the external environment – geopolitical situations in the region, the uncertainty about the outcome of the Brexit agreement, etc. Similarly, the European Commission forecasts a slower economic growth in the EU, which is the largest Latvian export market. A lower demand in the external markets, rapidly growing labour costs, and the slow growth in the productivity increasingly excel the importance of the global competitiveness of Latvian producers for further economic development.