At the beginning of 2017, gross domestic product growth accelerates

According to the flash estimate by the Central Statistical Bureau (CSB), GDP grew by 1.5% quarter-on-quarter in the first quarter of 2017 (seasonally adjusted data at constant prices). In recent times, it is the fastest quarterly growth, and it is the second consecutive quarter posting a relatively robust quarterly growth, which is beginning to be reflected also in improved year-on-year changes: compared to the first quarter of 2016, GDP grew by 3.9% (adjusted by calendar, but it is 3.9% also according to unadjusted data). It must be kept in mind however that the flash estimate will be corrected by the data on the development of the various branches of the economy coming in during the month.

A number of factors previously pointed to the likelihood that GDP growth could be positive in the first quarter: the relatively good results in retail trade, a high confidence indicator, both among entrepreneurs and consumers, aggregated by the European Commission, good tax revenue, good external trade data as well as good operational data in many euro area countries. Judging by operational data, the situation has slightly improved also in ports and on the railroad. GDP growth was slightly slowed down (in terms of quarter-on-quarter growth) by manufacturing. After the excellent results at the end of 2016, the branch slightly stepped back from its previous achievements, yet this was more than compensated by an outstanding quarter in the energy sector or, to be more precise, in electrical power production (this was, however, impacted by skewed seasonal factors: the spring flood took place slightly earlier than usual).

The big unknown in the beginning of the year was the construction sector. According to the information published by CSB, construction volumes, after a prolonged contraction, expanded in the first quarter year-on-year (by 8%). It must be kept in mind, however, that the first quarter tends to be unstable for the sector: the volumes are small and seasonal factors are influential. Right now, there are no strong indication of large-scale implementation of European Union (EU) structural fund projects. At least for now, however, it is compensated by a more active execution of private sector construction projects (selling spaces, office buildings, warehouses and factories) whose financing is not related to the implementation of EU structural fund projects. It is expected that in the second half of the year, as the construction of projects financed from the EU structural funds, growth in the sector and the related activities will accelerate substantially.

The beginning of this year marks a period when, barring new external shocks, GDP growth should accelerate and remain faster for a while than what has been experienced in recent years. We should remember, however, that such acceleration has a cyclical (a better external environment, resumption of accessibility of EU structural funds) character, which is not sustainable and hardly points to a structural vigour of the economy. Further steps are necessary to reinforce competitiveness of the economy. This has to do with tax reform, straightening out problems in healthcare and education and administrative reform. The upside of the economic cycle is usually inconspicuous for reform, for the economy and income are growing, thus creating the impression that everything is fine. It is also important to realize that the ability to reform will also be impacted by the local and national elections. It should likewise be kept in mind that the upswing of the economic cycle will not last forever and the growth of the long-term potential must be strengthened.

The flash estimate of GDP supports the previous GDP projection by Latvijas Banka – in 2017, GDP could grow by approximately 3.0% (by unadjusted data). A more comprehensive assessment of the prospects for economic growth will be possible in a month when the CSB will publish the full results of GDP results, i.e. the dynamic by branch and usage components.