Flash comment: Latvia

Economic commentary by Economic Research Department December 7, 2012

Exports lead the growth, concerns about slowing investment activity

Real GDP annual growth, %
40 30 20 10 0 -10 1Q 11

3Q 11

1Q 12

3Q 12

Household consumption Government consumption Gross fixed capital formation Exports of G&S Imports of G&S

According to the revised data from the Latvian Central Statistical Bureau, annual growth of the Latvian GDP in the third quarter was 5.2%. It was the third consecutive month when Latvia was the fastest growing economy in the EU. Growth is led by exports that grew by 7% compared to a year earlier. Its growth was driven by both very good grain crop and exporters ability to expand into less penetrated markets so far. Household consumption has also been swift solid 5.1%. A sharp slowdown is seen in gross capital formation where annual growth has slowed to just 2% down from 40% in the first quarter. Weaker investment activity is likely to be the major explanation for the decrease in imports that are down by 1.3%. Overall, growth remains broad based and only a few sectors have seen a decrease (e.g., finance and insurance activities by 3% compared to a year earlier). Manufacturing growth, which is the basis for export success, is dominated by metals that have expanded by fantastic 36%. Growth in other sectors is much more moderate or slightly negative.

Source: CSBL

Real GDP annual growth, %

10 8 6 4 2 0 -2 1Q 11
EU27 Estonia Latvia Lithuania

Outlook
This has been a very good year for Latvia and its GDP growth will be at least 5%. Yet, with the global weakness, growth in Latvia will slow down going further. Export growth will remain positive but slower as external demand is weak and competition is likely to intensify. Yet, experience shows that niche markets can provide some positive surprises. Household consumption will keep growing as wages and employment gradually rise. Yet, consumption can not survive on its own and its fate will be by and large determined by the dynamics of exports and EU funds. We have concerns about the sharp slow down of investment activity. Given that the weak economies in Europe cut wages to raise their competitiveness a measure that is no longer available for Latvia unless one considers very negative macro scenarios the only way to keep improving competitiveness is to invest in new products, production capacities and process optimisation. And it is possible in Latvia banks can and do want to issue loans in Latvia while for our competitors in Southern Europe access to credit will be a luxury rather than an everyday opportunity. Hence, this opportunity must be used as it will permit to take a more solid lead vis--vis competitors. Mrti Kazks Chief economist in Latvia martins.kazaks@swedbank.lv + 371 6744 5875

3Q 11

1Q 12

3Q 12

Source: CSBL, Eurostat

Swedbank Economic Research Department SE-105 34 Stockholm, Sweden ek.sekr@swedbank.com www.swedbank.com Legally responsible publisher Cecilia Hermansson, +46 8 5859 7720

Flash comment is published as a service to our customers. We believe that we have used reliable sources and methods in the preparation of the analyses reported in this publication. However, we cannot guarantee the accuracy or completeness of the report and cannot be held responsible for any error or omission in the underlying material or its use. Readers are encouraged to base any (investment) decisions on other material as well. Neither Swedbank nor its employees may be held responsible for losses or damages, direct or indirect, owing to any errors or omissions in Flash comment.