Latvia: Growth decelerated in 2016 but should pick up in line with investment in 2017

​Real GDP growth decelerated to just +0.3% y/y in Q3 2016, down from an average +2% in H1 and +2.7% in full-year 2015. This took the average of the first three quarters of 2016 to +1.5% y/y, which was mainly driven by domestic consumption and inventories. Consumer spending increased by +3.4% y/y and public consumption by +1.3% y/y in Q1-Q3. Fixed investment plunged by -22.8% y/y, largely because the use of EU funds for investment has fallen considerably below expectations. In part, however, this was compensated for by a sharp rise in inventories which added +5.9pps to Q1-Q3 growth. Lackluster export growth of +1.9% y/y was outpaced by imports (+4.4% y/y) so that net exports subtracted -1.6pps from Q1-Q3 growth.

Going forward, fixed investment should recover under a revised government plan for the use of EU funding, especially for infrastructure projects. Combined with robust consumer spending, this should lift full-year real GDP growth from an expected +1.6% in 2016 to around +2.4% in both 2017 and 2018. Further delays in the absorption of EU funds pose a downside risk to this forecast.