RIGA - The International Monetary Fund, in its latest global economic outlook, says that Latvia's GDP is set to increase 10.5 percent this year, and will be the strongest growth rate in the so-called emerging countries of Europe. Next year, however, this will moderate with a drop to 6.2 percent. This would deliver the "soft landing" scenario in which Latvia eases into a more sustainable level of economic growth.
Following the recent turbulence on the world's financial markets, the IMF has considerably downgraded growth forecasts for a number of countries around the world, including Latvia. As recently as this spring the fund's analysts estimated that Latvia's economy would expand by 7 percent in 2008.
According to these latest IMF estimates, Estonia's GDP will grow 8 percent this year and 6 percent in 2008, while in Lithuania economic growth is projected at 8 percent in 2007 and at 6.5 percent in 2008.
Latvia's inflation prognosis for this year has been jacked up to 9 percent in contrast to a 7.3 percent inflation forecast just this spring. IMF analysts expect inflation to remain nearly as high next year as well, at 8.9 percent, which would be the highest figure in emerging Europe.
Annual inflation in Estonia is expected to reach 6 percent for this year and climb to 7 percent next year, while in Lithuania inflation is expected to fall from this year's 5.2 percent to 4.6 percent next year.
Analysts at Denmark's Danske Bank warn however that the Baltic economies will face a harder landing than the larger countries in Central and Eastern Europe over the coming years. They expect economic growth to slow throughout the region, but say the larger economies, such as Russia or Poland, should see a slowdown that is fairly soft, while the smaller economies, including the Baltic states, will be harder hit.
"The slowdown in growth is especially driven by significantly tighter credit conditions in the region, especially in the Baltic states and Kazakhstan," bank analysts noted. The slowdown will be especially felt in domestic demand, and a fairly strong slowdown can be expected in private consumption, property prices and construction activity, they say.
According to IMF forecasts, Latvia through next year will remain in the unenviable position as the region's absolute leader in terms of current account deficit levels. Analysts predict now that the Latvian current account deficit will reach 25.3 percent of GDP this year, only to expand further to 27.3 percent in 2008. This is a dramatic rise from spring forecasts, when the IMF expected the current account deficit to hit 23 percent of GDP before narrowing to 22.7 percent in 2008.
Estonia's current account deficit is expected to be 16.9 percent of GDP this year and 15.9 percent next year, while in Lithuania the respective figures are forecast at 14 percent and 12.6 percent.
The IMF expects economic growth in emerging Europe to slow to 5.8 percent this year and to 5.2 percent in 2008, as domestic demand drops due to monetary and fiscal tightening. "Tighter global credit conditions are likely to dampen growth of house prices and household consumption, with knock-off effects for construction and business investment. Exports are also likely to slow as a result of weakening external demand from Western Europe and, to a lesser extent, strong currencies and rising wage costs," they say.
"However, the still significant wage differences vis-a-vis Western Europe and strong productivity growth will continue to support the competitiveness," the fund says. "The slowdown of activity is expected to be most pronounced in the Baltics, where some cooling of demand would be welcome," note the IMF analysts. "Rising inflation and wage growth is a problem everywhere in the region," claim Danske bank analysts, and that "The acceleration in inflation on the back of, in particular, higher food and energy prices, could weigh on private consumption."
IMF officials expressed concern that countries with large external imbalances 's the Baltics, Romania and Bulgaria 's may be significantly affected by the increased cost of external financing and higher risk premiums, following recent financial market turbulence.
In the third quarter of 2007, producer prices in Latvia went up 16.7 percent from the third quarter of last year, the central statistics office said. This was split between a surge of 19.4 percent for domestically sold goods and 13.1 percent for export goods.
