According to the data published by the Central Statistical Bureau, the economy grew 6.7% in Q1 this year, compared to Q1 2021. The rise has been significantly more rapid than assessed a month ago, while it should be noted that it was affected by the low base in Q1 2021 and the gradual cancellation of the Covid-19 restrictions.
Private consumption has made a significant contribution to GDP growth in Q1, which increased by 15.1% year-on-year. The increase was driven by both the reduction of Covid-19 restrictions and the increase in average wages and the decline in unemployment.
Investments have grown moderately – in Q1, they were 1.9% higher than a year ago. The sharp rise in costs restrained the construction sector (investments in housing and other buildings and structures declined by 8%). At the same time, despite growing uncertainty, investment in machinery and equipment increased by 11.2% and in intellectual property products by 24.6%.
Export volumes also continue to grow. Exports of goods increased by 6.8% (the main exported product was wood and its products). On the other hand, exports of services increased by 14.5% year-on-year (affected by transport services, computer services). Overall, exports of goods and services were 8.6% higher in Q1 this year than a year ago.
Development trends vary greatly across sectors – a decline is observed in Q1 in individual sectors, growth is continuing in other sectors, while some sectors are only beginning to recover from the effects of the Covid-19 pandemic. In Q1 this year, the most rapid increases are observed in the sectors that suffered the hardest during the crisis and are beginning to recover as restrictions reduce. Service volumes in accommodation and food service activities in Q1 were nearly 85% higher than a year ago, while growth in arts, entertainment and recreation reached 26.9%.
Growth in manufacturing is continuing. Thanks to the increase in exports, volumes of the sector increased by 8.3% in Q1. The growth was largely affected by growth in woodworking, metalworking, manufacture of building materials and the chemical industry. The increase in value added of the information and communication sector (by 8.6%) was affected by an increase in volumes in telecommunication services and computer programming activities.
The rise in retail sales volumes and the increase in the turnover of external trade in wholesale trade have had a positive impact on trade, with annual volumes increasing by 8%. In some sectors, volumes have declined in Q1. Volumes of agriculture and forestry in Q1 were 0.8% lower than a year ago (the decrease was attributed to the decline in forestry). The sharp rise in prices of construction materials (mainly wood products and metals) had a negative impact on construction, with production volumes decreasing by 8.4% in Q1. There was also a drop in energy and education in Q1 this year.
Overall, the performance of Q1 in the economy is evaluated as very positive. Household consumption is recovering, exports continue to grow despite the difficult geopolitical situation, business investment in equipment is increasing. However, challenges have also grown. In the current situation, the only solution for Latvian companies is new and diversified markets for the supply of raw materials, and shifting from Russia to more solvent Western markets. Strengthening Latvia’s energy independence in search of new supply alternatives is also a priority. In parallel, in view of the rapid price increases, the government is actively working on targeted support instruments for the population needing them the most,” the Minister of Economics Ilze Indriksone said.
In future quarters, economic growth rates will be slower than at the beginning of the year. This will be influenced by the base effect, the geopolitical situation in the region, and high energy and food prices. The extent of the economic impact of the Russian-Ukrainian conflict will depend on the duration of the war and the political reactions, but it is clear that the war will delay growth, and increase the pressure of inflation. However, growth will remain positive and can reach 2% year-on-year.