GDP decreased by 18% in 2009 in line with our expectations
Dainis Stikuts, Senior Economist

GDP shrank by 16.9% yoy in 4Q (flash estimate showed -17.7%). Seasonally adjusted data will be published later, but our estimates point to ca -2% qoq in 4Q, which is nearly 2 times slower fall than in 3Q. The major decreasing factor was investments (gross fixed capital formation down by 38.4% yoy) as the need for investment was lessened due to relatively high spare capacity, reduced profitability, tightened loan origination standards, and higher real interest rates.

Export recovery became stronger in 4Q due to recovery in foreign markets - seasonally adjusted quarterly increase most likely accelerated. In annual terms exports decrease slowed to 6.3% (-14.7% in 3Q).

Government consumption decrease accelerated to 14.3% yoy from 12.4% yoy in 3Q.

A positive surprise came from private consumption dynamics. In annual terms a fall slowed to 18.3% from 27.9% in 3Q. One of the possible explanations for that is deflation, which enabled people to buy more, as well necessity to spend more because of severe winter (e.g., on heating).

The largest contributors to GDP contraction in 4Q were trade (by 31.4% yoy), transport and communications (by 10.3%), manufacturing (by 9.0%) and construction (by 38.5%).

This year's underlying negative (e.g. disappointing manufacturing developments in January) and positive (e.g. 4% mom growth of retail trade volumes in January) trends are gradually balancing out and stabilisation in domestic demand is approaching. Most likely we will be able to see positive qoq GDP growth already in 2Q 2010 but perhaps also in 1Q. However, risks remain (e.g., uncertainty about 2011 government budget in light of the upcoming elections) and sustained GDP growth is expected to resume by the end of the year. Overall, we forecast that GDP contract by ca 3% partly due to the base effect.