Economic Analysis - Recovery Fuelled By Construction Sector - AUG 2017

BMI View: The Latvian economy is rebounding strongly and we forecast real GDP growth of 3.2% in 2017 thanks to a recovery in the construction sector resulting from inflows of European Structural Funds. Structurally, tax reforms aimed at boosting competitiveness are likely to be offset by the ongoing increase in the minimum wage rate.

The Latvian economy is firing on all cylinders with real GDP growth coming in at 3.9% y-o-y in Q117, its fastest pace since 2012. In seasonally-adjusted annualised terms, the figure came in at an even more impressive 6.0%, which marked the fastest pace since 2011. The ongoing recovery in the more developed European economies is providing a tailwind to growth, while easy global financial conditions are also supportive. The ongoing surge in the local stock market suggests that there is no end in sight to the ongoing economic recovery.

The main area of economic strength in Q117 came from the domestic side of the economy. According to preliminary estimates, construction growth came in at 8.0% y-o-y, marking a recovery in the sector after a lengthy period of weakness. As we argued previously ( ' Excesses Unwound, Growth To Rebound ' , February 8), the construction sector represents just 5% of GDP, which is close to the lows seen at the height of the Global Financial Crisis, and we believe that a recovery is likely in 2017. Our Infrastructure team is forecasting total construction industry value to increase by 7.3% in 2017, following an estimated 18.4% contraction in 2016. The recovery in the construction component of the European Commission's Economic Sentiment Index is a clear indication that the worst has passed for the sector. The construction sector weakened sharply in late-2015 and 2016 due to delays in investment due to a slow start-up of projects related to the new 2014-2020 European Structural Funds program. The recovery in such funding should provide a significant tailwind to construction and the economy as a whole.

Strongest Pace Of Growth Since 2012
Latvia - Real GDP Growth, % chg y-o-y And % chg q-o-q Annualised
Source: BMI, CSB

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