Latvian economy rockets 13.1 percent in 1Q

  • 2006-06-14
  • Staff and wire reports
RIGA - First quarter economic growth in Latvia reached a staggering 13.1 percent, the statistics office reported last week, triggering fears that the nation's economy has overheated and may even disrupt long-term development. The quarterly surge, the highest since the country gained independence in 1991, was led by trade (up 17.7 percent year-on-year), transport and communications (up 13.6 percent), manufacturing (12.7 percent) and construction (17.5 percent). In constant prices, Latvia's GDP amounted to 1.85 billion lats (2.6 billion euro) at the end of March.

Government officials immediately expressed concern over the data, with a central bank spokesman saying "such explosive growth creates risk for the balance of long-term development" of the state.
Martins Gravitis, spokesman for the Bank of Latvia, said that first-quarter growth was expected to be robust 's around 10 percent 's but not that high. He added that the share of industries in Latvia that depend on domestic demand and not on production is too large.

Independent analysts were also surprised by the figure. Parex Asset Management chief analyst Zigurds Vaikulis pointed out the surprising growth 's 18.5 percent 's of the so-called commercial services industry (transactions with real estate, lease and other commercial operations), as compared to an average 7 percent in the previous years. Since the share of this industry in the overall GDP structure is large 's about 13 percent 's the high growth figure influenced the total GDP growth.
"To tell the truth, it's no surprise that this sector is overheating," the analyst said.

Liene Kule, a senior analyst of Hansabanka, said, "Although full information about the income aspect of the structure of GDP is yet to be released, there are indications that the growth has not been 'healthy' 's that is, the economic structure is no longer as well-balanced as it used to be."
She noted that while last year's rapid growth was proportional in terms of domestic and foreign demand, this year the balance has been lost. Since this year started with a significant slowdown in exports, present growth is based mainly on domestic consumption.

SEB Latvijas Unibanka analyst Andris Vilks warned of property prices and bank lending. "The influx of large sums of capital in a short time has fuelled Latvia's economy. For the time being, state institutions see only commercial banks that are paying out loans in record amounts, but they close their eyes on absurdities in the real estate market, new construction projects, controlling the amount of cash in circulation and following the absorption of EU funding," Vilks said.