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International Internet Magazine. Baltic States news & analytics Sunday, 21.07.2024, 08:34

Economic growth in Latvia shoots up in 2017

Liva Zorgenfreija, economist, Latvijas Banka, 03.08.2017.Print version
In the last couple of quarters, the Latvian economy grew at rates well above those seen in the recent past. Cyclical recovery is observed not only in Latvia, but throughout Europe. In many countries and trade partners, growth is faster than forecast.

According to the flash estimate by the Central Statistical Bureau (CSB), gross domestic product (GDP) in the second quarter of 2017 grew by 1.3% quarter-on-quarter (at constant prices, seasonally adjusted data). Growth is slightly slower than was observed in the first quarter, but annual changes remain considerable. Year-on-year, GDP increased by 4.1% (unadjusted data). Adjusted by working days, the rise is even greater (4.8%), because in the second quarter of this year, there were two working days less than last year.  


Data available before the GDP flash estimate indicated that the quarterly growth would be fast. Yet after the weak growth of last year, this year’s recovery is neither a surprise nor a great achievement. Construction (+14% in Q2) and investment activities are resuming owing both to favourable financial conditions and increased lending as well as the acceleration of European Union (EU) funds in the second quarter.  


Industry (+8.0%), which, in recent years, has been one of the pillars supporting the economy is achieving ever new records. Operational data on mining and quarrying point to vigorous growth in the first half of the year, which is related to construction recovery.  Energy industry is also exhibiting commendable performance this year, even though the results of the second quarter likely lag considerably behind the fast growth in the first quarter. The sustained growth of manufacturing has taken place chiefly due to the favourable global environment.


In service branches, growth in Q2 was not as fast (+3.0%). The transport sector performed surprisingly well in the first quarter, but operational data on cargo flows in ports and on railway have deteriorated by the middle of the year. The situation in the sector might be improved by road transport where data on exports in April and May indicate growth.


Retail trade in the second quarter grew rapidly compared to the pace we have seen over the past year. The rise in disposable income of households was fostered by the favourable conditions in the labour market, but real purchasing power growth was hindered by inflation. Consumer confidence, which dropped rapidly at the end of last year, has been growing all this year, approaching a post-crisis record level in July. This is an indication that retail growth could continue also in the third quarter.


In June, Latvijas Banka raised its economic growth prediction for this year and GDP data for the second quarter indicate that it was right to do so. In the coming months, positive risks are related to the global environment and a faster cyclical recovery. Previously we named the expected tax reform among the factors that could potentially promote medium-term growth. However, due to many alterations the recently adopted changes in the tax system are unlikely to bring as positive a contribution to the economy as estimated before.   

The changes in the regulation of personal income tax and the increased minimum wage will foster consumption in the short term, but the compensatory measures (mandatory payments of government social insurance and increased excise tax) will reduce the positive effects. In the longer term, the new corporate income tax model has the potential of increasing investment, but investment decisions of entrepreneurs will also depend on other factors, for example, the strength of judicial system and the quality of business environment. There is the risk however, that the great haste, last minute changes and the fact that the tax system has to a certain degree become more complicated increase uncertainty and actually impede inflows of investment in the economy. We can only hope that the implementation of the new laws and the process of informing the population is smooth and the government sticks to its word to leave tax regulation essentially unchanged in the coming years.


GDP flash estimate can be slightly altered by data coming in over the month regarding sectoral developments, but, if the existing trends persist, GDP growth could be faster than forecast. The full GDP data, including information on growth in all branches, as well as GDP from the expenditure and income side, will be published in a month.


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