Quarterly Macroeconomic Developments
Report, October 2013
About the report
The Macroeconomic Developments Report is a quarterly
publication, based on data from the Bank of Latvia,
Central Statistical Department of Latvia, Ministry of
Finance and Financial and Capital Market Commission.
The publication assesses developments of the external
sector and exports, financial market, domestic demand
and supply, prices and costs and balance of payments,
and provides forecasts for economic development and
inflation.
Executive summary
Contradictory trends were observed in the global
economy in the second quarter. In July, the IMF revised
downwards the GDP growth forecast for several
countries and the economic growth in some of Latvia's
trade partner states also decelerated. Russia was
experiencing a further deterioration of economic
conditions, whereas Estonia's GDP contracted by 0.2%
in the second quarter. At the same time, growth
continued in Lithuania and the GDP rise in the euro area
(0.3%) caused moderate optimism. Overall, with the
concerns associated with the sovereign debt crisis abating and conditions in the core euro area
countries slightly improving but the economic development in some Latvia's trade partner countries
decelerating, the external risks have remained unchanged.
Latvia's exports continued on an upward trend, yet with the demand weakening in major trade
partner markets, the annual rate of export growth decelerated. The annual rise in exports was
dampened by the fall observed in the exports of base metals and articles of base metals on account of
discontinued operation of AS Liepājas Metalurgs. Despite unfavourable developments in the global
economy, Latvia's export market shares in world imports expanded.
1
This material has received European Union co-funding
within the grant agreement Communication activities in
connection with the introduction of the euro in Latvia.
On 9 July, ECOFIN adopted the final decision on Latvia joining the euro area and approved the
changeover rate (0.702804 lats for 1 euro). One of the reasons for a further decrease of currency in
circulation was that the population was preparing for the euro introduction. Lending did not
experience pronounced positive changes yet: lending to businesses remained stable, while household
debt levels continued to decline on account of gradual repayment of their loans for house purchase.
Interest rates on loans granted to households and non-financial corporations remained broadly
unchanged. With credit institutions remaining cautious in the field of lending and demand for loans
being weak, loans will continue to contract both in the remaining months of 2013 as well as probably
also in 2014.
Latvia's GDP growth rate reached 4.4% in the second quarter and was again the highest rate in the EU.
Private consumption remained the main driver of development for the second consecutive quarter,
supported by the growing disposable income and wages and salaries. It is expected that private
consumption will remain the main engine of growth also in the coming quarters.
In the first eight months of the year, tax collections were almost fully in line with the budget targets.
Although the growth of the tax revenue decelerated (a 4.3% year-on-year increase in the first eight
months of 2013), significant further rise was reported for all major types of tax revenue.
Following a negative annual and quarterly growth rate seen in the previous quarter, the performance
of manufacturing improved. Despite a further decline in annual terms (0.6%), seasonally adjusted
value added of manufacturing rose by 1.4% quarter-on-quarter in the second quarter. This
improvement was achieved by offsetting the fall in the manufacture of base metals by a rise in the
manufacture of other transport equipment, a sub-sector which is considerably smaller and historically
characterised by a large degree of volatility.
On the supply side, the vigorous GDP growth was largely supported by the development of the
services sector. The overall contribution of the services sector to the GDP growth amounted to 3.6
percentage points in the second quarter, with the largest positive contributor being real estate
activities. Transport and storage were the only negative contributors. With the negative trends
observed at the end of 2012 continuing, freight loaded and reloaded overall at Latvia's ports declined
by 11.4% year-on-year, and preliminary data for the third quarter also do not suggest any swift
improvement of the situation in ports and railway.
Labour market developments continued to mirror the economic recovery. The fall in the rate of real
unemployment over the last four quarters was the most buoyant in the EU, and unemployment was
11.4% of the economically active population in the second quarter. A significant increase in wages and
salaries is also a sign of labour market improvement. Contrary to the pre-crisis period, the current rise
in wages and salaries is more sustainable and based on respective labour productivity improvements.
This is also confirmed by the fact that there is no increase in the share of businesses singling out
labour shortage as a major growth-restrictive factor for business.
2
This material has received European Union co-funding
within the grant agreement Communication activities in
connection with the introduction of the euro in Latvia.
In the first eight months of 2013, annual consumer price inflation was, on average, close to zero.
Supply side factors remained the main drivers of the price developments: global energy and food
prices were lower than in the respective period of the previous year and the seasonal fluctuations
observed in other groups of commodities and services were also more notable than in the previous
years. A moderate rise in the annual consumer price inflation can be expected in 2014, provided that
the rate of economic growth remains similar.
Further information
The full report can be read and downloaded on the Bank of Latvia website at:
http://www.bank.lv/en/publications/macroeconomic-developments-report/3638. The publication is
available only in electronic form.
3
This material has received European Union co-funding
within the grant agreement Communication activities in
connection with the introduction of the euro in Latvia.