Latvian GDP still unbridled, banker admits economy is overheated

  • 2007-08-15
  • By TBT staff
RIGA - Once again analysts and bureaucrats scratched their heads in dismay at a fresh batch of economic data, which this time registered second-quarter GDP growth at 11.3 percent and annual inflation as of July at a staggering 9.5 percent 's both significantly surpassing public and private sector estimates. 
The data also deflated the false sense of assurance that had been growing in government circles after the anti-inflation plan was approved in March.

Commenting the indicators, Ilmars Rimsevics, chairman of the Bank of Latvia, was forced to admit that the economy is overheating, though he was quick to add that the situation is not critical.
July inflation alone amounted to 1.2 percent, which far exceeded forecasts since July is normally a low-inflation month. The rise in the consumer index was largely fed by gains in prices of tobacco, housing maintenance, and financial intermediation services. Food costs have also soared, particularly for bread and meat.
Consequently, annual inflation is now 9.5 percent, which is the highest in Europe and, for Latvia, the highest level since 1997.

Confronted with the hard truth, analysts said the indicators were "shockingly high" and that there was no reason to expect considerable improvement in the upcoming months.
"This level is unexpectedly high for the summer period, and the situation for the next months does not look promising either," Andris Vilks, chief economist at SEB Latvijas Unibanka, told the Baltic News Service.
"We can in no way refer to a benign influence of the inflation-curbing plan, as the factors driving price rise are not connected with the government's program," he added.
"Of course, the cautious lending policies implemented by banks and stabilization of the real estate market will reduce inflationary pressure by the end of the year, but these factors are insufficient to considerably reduce the growing inflation," Vilks said.

In the words of Olga Ertuganova, chief analyst at Latvijas Krajbanka, "If we were shocked at a price rise of 7 percent a year ago, now inflation is nearing 10 percent."
As she explained, "On the whole the data is shocking, especially if we consider that the trend is unlikely to change in the near future."
To be sure, some analysts were not the least bit surprised by the result. Alf Vanags, director of BICEPS, an economic think-tank, and Morten Hansen, a lecturer at the Stockholm School of Economics, said in the beginning of June that inflation could easily reach double-digit territory.

Ieva Veja, an analyst with Dnb Nord Banka, pointed out that bread (+25.8 percent annually) and meat (+14.8 percent) prices were growing out of control and that food prices demonstrated the presence of an inflation spiral, with steep salary increases (+32 percent annually in the first quarter) and other production expenses at the beginning of the year impacting consumer prices now.
Martins Gravitis, spokesman for the Bank of Latvia, said July inflation was largely expected and that the government's inflation-curbing planning has only kicked in.
"We shouldn't forget that several activities of the government's inflation curbing plan were only put into operation in July, so their influence cannot be immediate.

Besides, important components of the plan like a deficit-free budget this year and a budget with a surplus next year will be achieved much later," said Gravitis.
Still, there are more price increases on the horizon 's both regulated and non-regulated. Natural gas prices, for example, will shoot up dramatically due to Gazprom's higher price, and this will impact communal services. Food prices, meanwhile, are only going to keep ascending, experts said.
The statistics bureau also announced on Aug 9 that first-half 2007 exports grew 22.6 percent year-on-year, while imports swelled 30.1 percent. Exports amounted to 1.911 billion lats (2.72 billion euros) over the period, while the value of imports reached 3.71 billion lats.

The Bank of Latvia announced that the current account deficit reached 1.46 billion lats from January to June, up a staggering 80 percent year-on-year.