Latvia’s GDP went down by 0.6% in Q3 this year, and the slowing of economic activity will continue in Q4 as well, said SEB Bank economist Dainis Gašpuitis.
This will lower this year’s average growth to 1.5%. The effect left from previously imposed restrictions still appears in Q3, because of which tourism, entertainment and leisure sector, and commercial service sector show impressive growth. SEB Bank’s expert said he is happy to see such positive growth in the IT and communications sector (+14.2%). Development of this sector relies on exports, and soon it may become one of the engines behind the economy. At the same time, the ICT business maintains important potential. This means the state and Riga municipality should create conditions for this sector’s development.
The bank’s economist is, however, unpleasantly surprised by the weakness in the construction sector (-13.6%). This makes Latvia’s stand out among its nearest neighbours.
It is likely that negative trends in this sector will remain in the coming months. If costs stabilise, the construction sector, with help from EU funds, should start getting more active next year. The economist believes this is one of the most important tasks of the new government – keeping the sector from dipping deeper in the negative.
The 10.3% drop in trade was largely caused by the drop in wholesale trade, where it seems negative trends will remain for some time. There is also considerable negative contribution coming from general industry (-8.5%), which mainly comes from the drop in electricity generation. The drop in these three sectors has pulled economic activity into the negative zone slightly faster than was expected.
The biggest risk is associated with the year 2023: will Europe avoid an energy crisis? This means – how deep a drop in activity will surface at the start of the year and how strong a recovery can countries expect in the second half of the year? According to Gaišpuitis, it is clear that with each new cycle of outlooks expectations are corrected downward. Risks are upward facing, but there are also positive aspects. These include: relatively sustainable consumption, stable labour market and trends for energy prices (winter is expected to be warm as well). Even the weak signals of inflation going down in Eurozone and Latvia offer the expert some optimism.
If winter turns out warm, it will limit the effect on high prices on purchasing power. A full assessment of the situation is promised in spring, said the economist. Discipline with paying bills will likely worsen and will affect many companies. This is by businesses should prepare for prices going up. Sustainable consumption will provide additional assistance to businesses and allow them to continue investments.
If the economy manages to avoid a new energy-related shock, inflation will start showing signs of weakening and energy prices will no longer take any negative turns. This also means the general view will become more hopeful in a couple of months. «Our GDP outlook for Baltic States predicts minimal growth. For Lithuania the outlook is 0.1%, for Estonia – 0.3%, and for Latvia – 1.1%,» SEB Bank economist Dainis Gašpuitis concludes his assessment of Latvia’s economic state.
Also read: Latvia’s GDP down by 0.6% in Q3 2022