Rising private consumption pushed up both the production and the expenditure sides of GDP by 4.3% y/y in Q1, data from the statistics office show.

Retail sales soared by 19% y/y in Q1 in volume, as real wages surged by 15% y/y, the propensity to saving plummeted because of diverse factors including interest rates and consumer confidence. Some of the massive increase in mortgage lending also fuelled consumption, as loans were used to buy existing properties.

Household consumption increased by 9.2% y/y and contributed 6.6pp to the GDP advance, while on the production side, services - most likely wholesale and retail trade - capitalised on the consumption euphoria and captured 13.1% more value added than last year, contributing 2.1pp to the GDP growth.

On the production side, industry contributed a modest 0.1pp to the GDP growth and the value added generated in the sector expanded by only 0.5% y/y. The agriculture and construction sectors were not necessarily expected to make substantial contributions in Q1, seasonally.  

Notably, in Q1 the government collected some 3.8% more (net) taxes than last year. This indicates, under the circumstances of the VAT rate cuts, that either tax evasion has diminished or the impact of the hikes in the statutory minimum wage shifted the distribution of the value added in favour of labour with a positive impact on taxes. The high labour taxation rate provides that such a change in the distribution of the value added between capital and labour would improve tax revenues.  

 

On the expenditure side, gross fixed capital formation increased by 7% y/y and contributed 1.3pp to GDP growth. The volume of inventories decreased, with a negative 0.4pp impact on GDP. Foreign trade had a significant 3.4pp negative impact on GDP, meaning that more net imports were used in the process of domestic consumption and investments. It was the strongest rise in the use of net resources since Q1, 2008. While the external balances remain within manageable limits, this indicates unsustainable patterns.

The consumption euphoria that has been visible during the past quarters is to a certain extent explained by a possible reduction of tax evasion that allowed the government to cut VAT rates and/or a one-off adjustment of the value added sharing between capital and labour. These are sustainable drivers, despite being one-offs.

However, other indicators point to an unsustainable rise in consumption. While in Q1 private consumption, seasonally adjusted, was nearly 4% above the pre-crisis peak, gross fixed capital formation lagged 34% behind the pre-crisis peak. On the upside, the external balance is much smaller these days (net imports were only 1% of GDP in Q1 vs. 10%-15% in 2008 prior to the crisis). Shifting the value added from investments to consumption looks like a sub-optimal decision in terms of growth, but this depends as well on the quality of investments, and the real estate investments in the pre-crisis period support such statements.

Notably, while the consumption euphoria might damage internal and external macroeconomic balances, at least it does not create vicious circles that need costly adjustments. Indeed, insufficient investments are a cause for concern, but still the net investments increased by 7.5% y/y in Q1 and the gross fixed capital formation advanced by 7% y/y in the quarter. The growth rates were achieved from a low base, but so was the rise in retail sales and consumption.