The Latvian economy today: Unhealthy development
![](http://www.ir.lv/upload/image_file/name/2010_08/15350/hansens_laurisnaglins_leta-large.jpg)
The latest we have on Latvian growth is 3.3% for Q3 2015. Not bad by EU standards at the moment but not exactly thrilling for a catch-up economy either. Digging a bit below the surface and the numbers actually look even worse.
To see this, I have looked at GDP growth as well as growth of its main components - private sector consumption and exports; the two biggest items, and private sector investment as well as public sector consumption. All of this is portrayed in Figure 1. Investment is of course very important but its variability hurts the graph so I exclude that component in Figure 2, which is otherwise the same as Figure 1.
Figure 1: Annual growth rates of main demand components of the Latvian economy, 2011-1 - 2015-III
Source: Central Statistical Bureau and own calculations
And even Figure 2 may be a hard read so I supplement it with Figure 3 that tries to zoom in on the most recent development, in this case from 2013.
Figure 2: Like Figure 1 but with investment removed
Figure 3: As Figure 2 but covering 2013 - 2015
And then I can (finally) make some comments. The subdued development of GDP, which we often attribute to a slow-growing Eurozone, a lack of new lending from the banks and poor relations, economic and otherwise, with Russia has an unpleasant composition that does not bode all that well for the future.
It is driven by domestic consumption, which is positively affected by low oil prices and quite rapidly rising wages. The former may continue for quite a while but the latter is destroying competitiveness of the economy and is not sustainable. It is also driven by public sector growth - public sector consumption growth has been higher than GDP growth since the fourth quarter of 2013. This is unwelcome news for an economy that is very close to full employment in which case fiscal policy, according to textbooks as well as the Fiscal Discipline Law, should be more restrictive.
Exports are performing dismally with no substantial growth rates since the end of 2012 and while investment showed an uptick in Q3 2015 its growth has otherwise been dormant since 2012.
In short, we have an economy that is growing but unsustainably so and for all the wrong reasons. Not the nicest way to start 2016.
Morten Hansen is Head of Economics Department at Stockholm School of Economics in Riga and a member of the Fiscal Discipline Council of Latvia
Comments here may not reflect the views of the Fiscal Discipline Council