The Central Statistical Bureau of Latvia reports that in Q3 2023, as compared to the same period of 2022, Latvia’s GDP went down by 0.1%, according to seasonally and calendar unadjusted data.
Meanwhile in Estonia GDP went down by 2.5%, as reported by ERR.
This is the price of limiting inflation, says SEB Bank economist Dainis Gašpuitis in his commentary on this data. According to provisional estimates, Latvia’s GDP was influenced by the 3.3% drop in manufacturing sectors and 0.1% drop in service sectors.
The volume of taxes collected for various products was 1.9% higher than expected.
Compared to Q2, seasonally and calendar adjusted data indicates that GDP went down by 0.6% in Q3. A full report from the Central Statistical Bureau of Latvia on GDP volume and changes in Q3 2023 will be published on the 30th of November.
Statistics Estonia will clarify its data on the country’s GDP changes in Q3 at the end of November. According to the provisional estimate – in July 2023 Estonia’s GDP suffered a 2.5% drop when compared to Q3 2022. The institution also notes that in Q1 and Q2 the country’s GDP went down by 2.9% and 3.2% respectively.
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SEB Bank economist Dainis Gašpuitis’ operational analysis:
The flash estimate turned out less grim than outlooks even though the situation is far from great. Likely this is an optimal situation in which inflation prevention is the primary goal. In order to lower inflation to the level desired by the European Central Bank (2%), pressure on the economy through increased interest rates rates will remain. This is why
the test of Eurozone’s economy, Latvia included, will continue.
It will be the government’s objective to balance risks in order to prevent the economy from ending up in an even deeper decline while also reasonably implementing support measures. Looking through the prism of inflation, stagnant conditions in the economy will remain in place for the next six months. The external environment will stabilise once the purchasing power of more sustainable consumers and the confidence in export markets have recovered. But this will be a rather long and gradual process.
The dropping inflation in EU member states has already caused purchasing power to go up. However, confidence will be reinforced by clearer signals regarding the reduction of interest rates. According to existing outlooks, a clearer picture may appear in Q2 2024. In many parts of Europe consumers will recover the purchasing power lost to inflation around the end of 2025.
In the coming months, the volumes in Latvia’s exports and processing industry will continue going down.
Despite the recovery of average purchasing power in Latvia, growth with recover gradually in domestic consumption. Positive signs are expected from investments, where increase influx of European funds is expected. This should stimulate private investments as well. Growth will likely continue in the ICT sector, where it is largely based on exports and helps compensate the volume drop in exports of goods.
The labour market turned out to be incredibly resilient. Surveys among businesses show that the shortage of labourers remains a major problem. This is why no major worsening on the labour market is expected. It is likely the economy will conclude 2023 with a slight drop. This is the price of limiting inflation. Next year, as the inflation environment stabilises, growth will recover to 2.5%.
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