While in Q1 economic growth turned out stronger than expected, with service sectors showing stronger recovery from Covid-19 restrictions and with Russian-Ukrainian war not having much of an impact on producing industries, the situation in Q2 turned out completely different, and economic development turned out weaker than expected, as reported by Ministry of Finance.
In April and May good growth rates remained in processing industry. Rapid growth was observed in the service sectors, including accommodation and catering, transit and air transports. At the same time, the indexes of the general mood among entrepreneurs and consumers have become significantly worse since February. This is especially true for consumers. This indicates a possibility of continued economic recession.
In Q2, according to flash estimates from the Central Statistical Bureau of Latvia, service sectors maintained 4.1% growth over last year’s Q2. Production sectors showed a drop of 0.4%. More detailed GDP information is not yet ready to be published, but data available for recent months indicates that the processing sector still maintained high growth rates, with output volumes increasing by more than 6% when compared to April and May 2021. A drop was observed in the construction sector. The construction sector was the first industry in Latvia to have experienced the consequences of rapid price rise, which made existing construction contracts more expensive. The sectors is also negatively affected by the shortage of construction materials and growth security risks, which make private investors be more cautious about investment projects in the region. The volume of state investments currently does not exceed last year’s amounts despite the planned increase.
In the service sector the biggest growth was observed in accommodation and catering sectors, where the number of guests has more than doubled when compared to last year’s levels. The number of passengers serviced by airports has quintupled when compared to a year ago. The transit sector too reports good results, as volumes of freight carried by railway have increased by more than 20% when compared to Q2 2021. At the same time, with freight volumes from Russia disappearing entirely, a rapid decline was objected in the sector in June. A similar slowdown is also observed in retail trade, whereas in the wholesale trade sector a more rapid drop started as early as April as dealings with Russia steadily declined following its invasion of Ukraine.
Data for recent months indicates that the economic recession has begun and will likely continue in the coming months,
when the growth of costs and supply disruptions will start having an even bigger impact on processing sector and residents’ consumption goes down even more in response to growing prices on necessities and housing.
A similar situation is observed in other countries around the world, including Latvia’s biggest foreign trade partners, where economic growth is already slowed and demand for Latvian exports may become weaker. ESI suffered a rapid drop in July, dropping to below long-term average, which was observed in Europe in 2021. Data on GDP dynamics in Latvia’s biggest trade partners is not yet available for Q2, but flash estimates indicate a possible decline. The last reports from those countries show that GDP growth estimates have been significantly corrected downward. This is true for Germany, Sweden and Finland. Slower economic growth is also expected in Lithuania and Estonia, as reported by Latvia’s Ministry of Finance.