RIGA - Swedbank forecasts growth to slow to 1.9% in 2015, mostly owing to the deep recession in Russia. The revised data by the Central Statistical Bureau of Latvia showed a slightly swifter economic growth in Latvia in the fourth quarter of 2014 compared to the flash estimate. Namely, annual growth was at 2.1% (not 1.9%).
Household consumption was still the main growth driver. However, export growth also picked up in the fourth quarter, despite the deteriorating economic situation in Russia and the dramatic depreciation of the ruble in December 2014.
Exporters have still been able to make up for their losses in Russia with growth in other markets. Both household consumption and exports rose by 2.2% in the fourth quarter in annual terms. In 2014, export growth was a bit below household consumption (1.9% vs. 2.3%).
Investment performance improved a bit in the fourth quarter, but activity remained very weak. Gross fixed capital formation rose by marginal 0.4% in annual terms after a fall in the third quarter. Geopolitical uncertainty and a fall in demand have played a role: businesses have been very cautious with new projects.
In 2014, gross fixed capital formation grew by 1.6%, owing to solid investment activity in the first half of the year. Import growth picked up in the fourth quarter, in line with better performance of investments and exports. In 2014, import growth was still rather cautious (1.5%) and slower than that of exports, investments and household consumption.
From the industry perspective, nearly all sectors were growing in 2014. The only falls were in real estate. The fastest growth was seen in construction, the arts and recreation, the financial sector, and public administration. Some sectors were growing and increasing number of employees like in transport, tourism, IT and communications while others mostly improved productivity reducing number of employees like in many services sectors.
Swedbank’s growth forecast for this year is, less than last year, which can be explained by a forecast of deep recession in Russia and the depreciation of the ruble. This will cause an even bigger fall in exports to Russia and CIS countries including a negative impact on investments.
However, exports to other growing countries will continue to rise, while households will be able to spend more with their purchasing power increasing due to wage growth and negligible inflation.
Some industries will feel the growth, but for others, stagnation if not a fall will be the impression. The domestic market (retail and commercial services) will most likely grow, long-haul truck businesses are expected to decline.
For exporting sectors such as manufacturing, agriculture, and tourism, the situation will differ a lot. It will depend on how differentiated trade partner structure is, and how successful businesses are in penetrating new and existing markets.
Growth in Latvia will remain very slow in 2015: the convergence gap is still sizeable and likely to be uneven, concludes Swedbank.