According to the CSB data, the economy grew 3% in Q2 this year, compared to Q2 2021. The main factors that have a negative impact on growth rates this year are the high geopolitical uncertainty, the sharp rise in energy prices and the disruption of raw material supply chains due to the Russian invasion of Ukraine.
In view of the consequences of the Russian invasion of Ukraine on global markets and supply chains, the performance of Latvian companies so far is appreciated – exports and production volumes are growing, consumption remains stable, contributing to demand in the internal market. But it is clear that there are major challenges in the economy that we will have to overcome in the coming months. The government has already approved support of more than EUR 400 million for households in this heating season to mitigate the impact of high energy prices on the purchasing power of the population. In the future, all electricity users will further have zero MP item in their bill, and we are also rapidly moving forward with aid for companies. It has been decided that from this October legal persons will be fully compensated for the electricity system service fee for 7 months, while energy-intensive manufacturing companies will have access to state aid to compensate for the increase in energy costs. In these uncertain circumstances, the competitiveness of businesses is essential,” the Minister of Economics Ilze Indriksone indicates.
The consumption of households made a considerable contribution to the increase in GDP. While there is a significant increase in consumer prices, private consumption at constant prices in Q2 was 7.9% higher than a year ago. The increase was driven by the increase in average wages, the reduction in unemployment and the complete cancellation of the Covid-19 containment restrictions.
Despite the big uncertainty, investment has increased in Q2 – 2.7% year-on-year. Due to the rapid increase in costs, investment in buildings and structures fell 13.8%. At the same time, investment in machinery, equipment and vehicles increased by 18.2% and in intellectual property products – by 19.8%.
In Q2, the growth rates in both exports and imports remained high. Exports of goods and services in Q2 grew by 9.1% compared to Q2 of the previous year. Taking into account the high base effect, the increase in exports of goods is more moderate – 5.7%. On the other hand, exports of services have increased by more than 20% during this time, affected by an increase in exports of transport services, computer services. This year, in Q2, imports of goods and services were 11.2% higher than a year ago.
There are different development trends across sectors. Rapid growth rates are seen in the sectors hit the hardest by Covid-19 restrictions. In Q2, the increase in accommodation and food service activities reached 77.4%, amusement and recreation activities – 35.9% and air transport – 3.7 times. There was a rapid increase (by 15.3%) in business services (legal and accounting activities, professional, scientific and technical activities, advertising and market research), as well as in ICT (+16.5%). The average growth rates of the economy were also exceeded by the largest manufacturing sectors – growth reached 7.9% in Q2 in agriculture and forestry and 5.8 per cent in manufacturing.
Some sectors experienced a drop in Q2. The sanctions imposed by the EU have resulted in a decrease in the turnover of goods with Russian and Belarusian markets, resulting in a 21.1% decrease in the wholesale sector compared to Q2 of the previous year. The sharp increase in costs has led to a review of planned construction projects or extension of their deadlines – construction volumes in Q2 were 13.8% lower than a year ago. In Q2 this year, there was also a drop in energy, mining and financial services.
In future quarters, economic growth rates could be slower than at the beginning of the year, yet overall growth this year will remain positive and can reach 2-3 percent during the year.