In a first estimate of Q2/13 GDP Central Statistical Bureau of Latvia reported seasonally unadjusted GDP growth of 3.8% y/y and seasonally adjusted 0.5% q/q in Q2. In H1, 3.7% y/y growth was seen. The banking analysts surveyed by BNS believe that H1 economic growth was slower than expected. Domestic demand supported the growth while exports slowed down in Q2.

The Bank of Latvia economist Igor Kasjanov commented on makroekonomika.lv that GDP most likely continued to be EU’s fastest growing in y/y terms. At the same time growth pace is slightly slowing down, which is not surprising given weak external environment. The CB economist also notes that slowdown in Europe has been quite long-lasting already, but Latvian economy has proven resilient to it in the past.

The CB reiterated that domestic demand cannot be expected to support the economy in the mid-term. Most recent confidence and new orders date from EU points to a sufficient improvement of external environment in the coming quarters. This makes the central bank hopeful that a slight slowdown in Latvian growth will be temporary.

For Q1/13 Central Statistical Bureau of Latvia reported GDP growth of 3.6% y/y and 1.4% q/q, upping the previous estimate of 3.1% y/y and 1.2% q/q. GDP in current prices in Q1/13 was LVL 3.6bn (EUR 5.12bn). To compare, GDP increased by 5.1% y/y and 1.4% q/q in Q4/12, while in 2012 overall economic growth was 5.6% vs. 5.5% growth seen in 2011.

GDP growth slowing down moderately to 3.6% y/y in Q1/13 and maintaining the same q/q growth pace was a relief: In the beginning of the year the Bank of Latvia was alarmed that economic growth in Latvia could be smaller than expected amidst declining exports and manufacturing and prolonged weak external environment.

However, Q1/13 data shows that domestic demand managed to sufficiently compensate weaker external demand: trade gained 4.6% y/y (15.6% share in GDP), construction advanced by strong 9.8% y/y (3.3% share in GDP). Private final consumption in Q1/13 grew by 4.9% y/y in Q1/13. Gross capital formation declined by 10.6% y/y, which was in part compensated by a 1.1% y/y rise in government spending. Exports of goods increased by 3.6% y/y and exports of services by 1.4% y/y. Imports of goods increased by 1.9% y/y and declined by 3.2% y/y for services.

Recently FinMin revised the GDP growth forecast for 2013 from previous 4% to 4.2%. Medium-term economic growth expectation remains unchanged at 4%. FinMin believes that domestic consumption is going to determine most of economic growth this year, while in the medium term Eurozone recovery, the economy will become more balanced between exports, consumption, and investment.

Latvia’s EconMin expected GDP growth in 2013 and 2014 at 4.5%. The 2014 growth might be lower should the external environment not improve. The Bank of Latvia also announced the revised macroeconomic forecasts in July. GDP growth in 2013 is expected at 4.1% vs. previous forecast of 3.6%. Inflation is seen averaging to 0.7% y/y this year vs. previous forecast of 1% (already cut once from initial 2% expectation).