Flash comment: Latvia

Economic commentary by Economic Research Department February 11, 2013

Latvia was the fastest growing EU economy in 2012

GDP real growth, %
10 Quarterly, sa (rs) Annual, nsa 0 0 5

As we had forecast, in the last quarter of 2012 the Latvian growth slowed somewhat, but still remained very strong. Namely, quarterly GDP growth slowed to 1.3% (down from the recent peak on 1.7% a quarter before) or 5.1% vis--vis the last quarter of 2011. Manufacturing was up by 1.8% in quarterly terms (seasonally adjusted) or nearly 8% in annual terms. Lions share of it was exports, where the weakness of Latvias major trade partners such as Germany was compensated by extending to previously less penetrated markets in Europe and elsewhere. Exports were also temporarily boosted by historically high grain crop. Household optimism continued to inch up retail turnover marginally shrunk in quarterly terms, but due to growth being accumulated throughout the past year it still meant that retail was nearly 10% above its previous years level. If historical data series will not be revised, todays flash estimate published by Central Statistical Bureau of Latvia suggests that GDP growth last year was faster than the year before. Namely, about 5.6% compared to 5.5% in 2011.

-10

-5

-20 2008 2009 2010 2011 2012

-10
Source: CSBL

GDP and economic sentiment index

110 10% 5% 100 0% -5% -10% -15% -20% 70 2008 2009 ESI, points 2010 2011 2012 -25% 2013

Outlook
Yet, with the weakness in the European economy, we expect Latvian growth to continue to slow down this year. While household consumption has been strong, the major underlying factor behind growth is exports. Export success has been driven by the hard-won competitiveness gains during the recession. Yet, these gains are gradually waning as other crisis hit economies in Europe cut their wages and employment. For Latvia such measures are not viable any more unless very negative global scenarios play out. Hence, competitiveness must be retained in other more difficult ways. For instance, by investing in new products, more efficient processes, access to other export markets. In this respect the very fast slowdown of gross fixed capital formation last year down from 40% annual growth in 1Q 2012 to just 2% in 3Q is worrisome. While global uncertainty is still high, the recent confidence indicators suggest that the worst is behind us and further sharp worsening is not very likely. Of course, cautiousness must be retained and possible negative risks born in mind, but investments are very important for ensuring future growth. GDP growth is expected to keep slowing down in the near quarters and speed up again only when the European economy gains traction, which we expect in 2H 2013 or 1H 2014. We forecast growth to reach about 4% in 2013. If this is the case, Latvia will be one of the fastest growing EU economies also this year. Mrti Kazks Chief Economist in Latvia martins.kazaks@swedbank.lv + 371 6744 5859

90

80

Annual GDP growth (rs)

Source: CSBL, DG ECFIN

Swedbank Economic Research Department SE-105 34 Stockholm, Sweden ek.sekr@swedbank.com www.swedbank.com Legally responsible publisher Magnus Alvesson, +46 8 5859 3341

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