Strong GDP forecast for Latvia

  • 2005-03-16
  • From wire reports
RIGA - Latvia's inflation rate soared past expectations last month, and looks set to continue in this direction, according to analysts.
"Higher inflation is expected in March as well, considering that fuel prices have risen by a couple of santims and the increases in food prices are not likely to subside. Evidently, it will run at some 0.6 percent - 0.8 percent," said Andris Vilks, head of market and sector analysis at Latvijas Unibanka.

He added that February's consumer price index data were "causing concern because they signal a high inflation level in the future as well," and that he was surprised by the relatively extensive price-increases of various food products.

For the time being, Unibanka will not change its annual inflation forecast, which is still expected at 5.4 percent, according to Vilks.

The bank will revise its forecast only "if the inflation is higher than we expect during the spring months as well, because then summer inflation will be unavoidable," he said.

The Bank of Latvia is also considering changing its average annual inflation forecast of 4.5 percent - 5 percent. The prediction could be premature, as the price of raw food might fall after the winter months. The fluctuation is especially dependent on whether the agriculture season was successful, because prices of raw food traditionally increase over winter, said bank spokesman Martins Gravitis.

Zigurds Vaikulis from Parex Asset Management shared Vilks' surprise over last month's high growth in food prices.

Vaikulis predicted that inflation would remain high in March as well, saying that, traditionally, garments and footwear are the driving force once winter retail discounts end and new collections arrive in stores.

"The rise in fuel prices will also contribute to higher inflation, but it is hard to tell how much," he said. "At the beginning of March fuel prices were even higher than in February. A significant inflation effect is possible, even if the price rises only a couple more santims by the end of the month."

The statistics office said on March 8 that consumer prices grew 0.9 percent in February on January, marking the fastest growth for this month since 1996. In February 2005, the rate of inflation was 6.9 percent year-on year.

Almost simultaneously, the Latvian central statistics bureau reported that the country had maintained the Baltics' steepest economic development for the fourth quarter of 2004.

The country's gross domestic product has climbed 8.6 percent year-on-year. In Lithuania the respective figure was 6.4 percent and in Estonia 5.8, according to preliminary estimates.

Overall growth last year was 8.5 percent in Latvia and 6.6 percent in Lithuania, with Estonia planning to announce its GDP growth for 2004 at the end of March.

However, unlike February's rate of inflation, Latvia's high 2004 GDP growth caused no surprise. And analysts predict that the rate will be somewhat lower this year.

Liene Kule, a senior analyst from Hansabanka, said that last year's increase came as little shock since the nine-month results signaled toward it.

Kule added, however, that 2004's outcome brought along certain unpleasant things as well, such as growing inflation.

"Rising prices are frequently associated with fast economic growth, and at times serve as a stabilizing factor, cooling down consumers. So far no major stabilization has been observed. We expect that high inflation will gradually slow down the booming consumption, and hence the GDP growth this year will be lower than last year," predicted Kule.

Vilks said last year's data showed that "we are still riding the wave, and this year the increase will also be close to 7.5 percent."

"It is unlikely to reach 8 percent but will not be lower than 7 percent either," he specified.

Parex Asset Management also expects somewhat lower rates, forecasting a 7.5 percent GDP increase in 2005.

The Latvian Central Bureau of Statistics said GDP growth was pushed up by growing volumes in trade (accounting for 18.4 percent of GDP) by 10.1 percent, as well as growth in transport and communications (15.7 percent of GDP) by 12.9 percent, manufacturing (14 percent of GDP) by 7.9 percent and construction (5.8 percent of GDP) by 13 percent from 2003.