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Economists predict economic growth in Latvia to continue

Dainis Gašpuitis/SEB.
Latvia’s economy will grow more slowly than it did in Q1. Growth will likely reach at least 4%, predicts Luminor Bank economist Pēteris Strautiņš. SEB Bank’s macroeconomic expert Dainis Gašpuitis is more reluctant in his outlook. He expects economic growth rate to be 3.7%, considering global cycles and negative trends in certain sectors. Swebank senior economist Agnese Buceniece predicts economy to grow 3% this year.

SEB Bank’s economic expert Dainis Gašpuitis says: «In spite of shocks in the financial sector, nervousness in light of global developments, including trade wards, Latvia’s GDP has grown 4.3% in Q1 2018. Industrial output was +3% in the first three months. Export growth turned out surprising: +15% in first two months. Trade has gone out of hand, as well. This is demonstrated by retail trade growth of 5%. There are also no doubts about developments in the construction sector, where a clear boom period has begun (35%). Other service sectors are expected to experience healthy growth.»
 

The expert adds that performance of future quarters will depend on global processes, especially in Eurozone. «In January, economic mood reached the highest point in the post-crisis period. Although it declined later on, it remains sufficiently high. Similar movement is observed towards OECD economic growth indexes. Although somewhat lower, it nevertheless points to stable growth this year. Other conditions promise to the positive in spite of remainder of geopolitical and trade war risks.»
 

Luminor economist Pēteris Strautiņš points towards the rapid growth recorded at the beginning of the year. «GDP growth in Q1, according to the flash estimate, was 4.3%. Seasonally adjusted data, on the other hand, suggests GDP growth was 5.2%. Compared to the previous quarter, Latvia’s economy has growth 1.7%. Seasonally adjusted growth for the quarter and annual look was the second most rapid in at least six last years. It is possible that Latvia’s economy this year may grow slightly slower than it did in Q1. It will likely reach 4%.»
 

SEB Bank’s expert is not as confident with such a positive prediction. «Considering the global cycle and clearly negative trends in certain sector, this year’s economic growth outlook is 3.7%,» says Gašpuitis.
 

Swedbank’s senior economist Agnese Buceniece is also cautious in her predictions: «It is expected that the domestic economy will remain strong in the coming quarters to handle the collapse of banks’ non-resident segment. Swedbank’s predicted economic growth rate for 2018 is 3%. Considering the powerful start of the year, 3% is a very cautious outlook. We maintain it because we expect non-resident deposits to continue declining. We also expect import volumes to grow more quickly than they did at the beginning of the year, considering increased construction and investment activity. Economic growth rate will likely become slower in the main export markets, because of that Latvia’s GDP growth rate should be slowed down in the future quarters.»
 

Experts from Swedbank and Luminor both underlined the rapid construction growth. Swedbank economist Buceniece notes: «Rapid growth in construction has exceeded last year’s accomplishments. It demonstrates capable investment growth. Realization of EU fund projects, high load and construction of different procurement centres, stores and office buildings contributes to this. It looks as if very rapid construction growth has more than compensated the collapse of the non-resident segment.»
 

Luminor economist Pēteris Strautiņš adds: «The opinion that the construction sector depends on EU funds is popular. Impact from it is considerable, but it should not be exaggerated. One of the industry’s leading companies – Merks – reported its last year’s results on Wednesday, 2 May, adding that its service portfolio was expanded by projects worth EUR 178 million in the last sixteen months. This amount exceeds the company’s already rapidly growing turnover (by 68%) from last year. 99% of this amount is formed from orders of the private sector.»
 

Both SEB Bank and Luminor experts mentioned turnover decline in port and railway sectors, adding that what used to be called as traditional transit or carrying raw materials from east to west no longer plays a major role in economy as it used to. «Transit is no longer a dominant transport service in the export sector. Aviation and land transport export volume was EUR 1.311 billion, whereas port and railway export volume was EUR 711 million. This year’s proportion will have more than doubled this year,» says Strautiņš. Gašpuitis points to a decline in port (-18.2%) and railway (-15.4%) freight turnover. «It is expected this turnover decline will continue this year,» he adds.
 

Both economists agree that it is thanks to the situation on the labour market and wage rise there will be fertile soil for future consumption growth. Strautiņš predicts that retail trade and other consumption industries will grow at an equal rate. At the same time, he notes that «state budget revenue in Q1 grew more rapidly than expenditures, because of that, current fiscal policy’s influence has had a slowing effect on the economy.»

BNN

06-05-2018
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