RIGA - Retail sales in Latvia dropped 5.1 in May compared to last year, while the fall in sales over the first five months of the year was 1.9 percent compared with the same period in 2007.
The result, announced by the state statistics agency on June 30, is the strongest indicator yet that Latvian consumers, who for years after joining the European Union spent with abandon, are scaling back spending in a major way.
The agency said that May retail sales fell 2.4 percent from April, with food sales rising 0.2 percent and non-food products falling 3.8 percent month-on-month.
Compared to May 2007, food sales dropped 5.8 percent and non-food sales 4.6 percent.
Automobile sales have plummeted dramatically, falling 25.9 percent in May compared with the same month last year.
A perfect storm of higher food and energy prices, tighter bank lending, an overheated real estate market and global turmoil have conspired to take the air out of Latvia's growth bubble. Over the four year period 2004 's 8, the economy grew 50 percent.
Now, however, the grim forecasts of a hard landing, or growth approaching zero, appear to be coming true.
"Although there were no illusions about the data for upcoming months, such a steep fall [in retail sales] is an unpleasant surprise and does not promise anything positive in the future as well, if conclusions are not drawn from the situation," Andris Vilks, chief economist at SEB Banka, told the Baltic News Service.
The economists warned that retailers would have to adjust their pricing policies sufficiently if they didn't want to lose the Latvian consumer.
"Residents are concerned about how much to spend on food and what products to buy, which could considerably change the food habits and product range in shops. A focus on cheaper imports will be a danger signal for Latvian producers, who are receiving minor support from the government or the EU," Vilks said.
The drift toward foreign products appears to have started already.
Data from the Latvian Agricultural Market Promotion Center show that the proportion of imported food products in 2007 increased by two percentage points to 34 percent of the total grocery market. Part of the rise was due to the closing of Latvia's two sugar factories, the center said. Vilks said retailers needed to act now. "Everything is in the hands of the traders. What is taking place now is a change of values and orientations 's apathy is being replaced by confusion and thrift," he said.
"Latvian prices have to be adequate to the local purchasing power capacity, and as long as they aren't it will be difficult to lure the buyer into the shops," he said.
