RIGA - Fresh data on retail sales and bank lending released over the past week demonstrate that Latvia's economy, the fastest growing in the European Union, is slowing down, in some cases dramatically, with fourth-quarter GDP growth likely to be significantly lower than previous reporting periods.
At the same time Morgan Stanley, a top international investment bank, said in a report that all three Baltic states were undergoing a significant downturn in economic growth and that the countries still faced challenges with inflation, energy prices and inflated real estate prices.
In Latvia, October retail sales declined 1.1 percent as compared to September 's the first such fall in years 's while year-on-year growth amounted to 9.1 percent, which is lower than annual inflation and indicates that retail activity has declined.
In the banking sector, Latvian banks' total mortgage loan portfolio increased 1.9 percent in October, a pittance compared to previous monthly gains. Year-on-year, the mortgage market is up 52.5 percent to 2.6 billion lats (3.7 billion euros) as of the end of the month.
More tellingly, however, were the bank's aggregate assets, which in October declined 1.3 percent, or 258.7 million lats.
Analysts said the sales data meant retailers would have to rethink their pricing policies. In the words of Dainis Gasputis, an economist at SEB Latvijas Unibanka, "It is a serious sign for retailers to revise their price policies and get ready for tougher competition in the near future."
He said the sales reflected the general mood of consumers, who are fretting about inflation and expecting energy prices to rise in the future.
DnB Nord Banka's Ieva Veja said October sales growth of furniture, household goods and electric appliances fell by some 50 percent.
"Retail sales data show that domestic demand has declined because of an increase of prices. The economic growth based on domestic demand in the fourth quarter will be smaller, and the rise of gross domestic product in the fourth quarter might be brought down by 1 - 2 percentage points," she said.
Wages have continued to soar, jumping 32.9 percent in the third quarter, the same astronomical level as the first two quarters. Veja, however, said that in the fourth quarter no such growth in wages was expected due to the government's anti-inflation measures.
Morgan Stanley said that, looking forward, it expected neither social unrest nor an attack on Baltic currencies, but peak inflation still lies ahead and will be contingent on the planned steep rise of natural gas prices by Russia. This, coupled with property prices, pose the biggest challenge for the Baltics.
"The situation on the real estate market and gas supply negotiations, which may result in a 40 - 50 percent rise of energy resources prices in the Baltics, are of bigger concern to us than exports' competitiveness," Morgan Stanley's analysts noted.
The Baltics will be able to avoid a lending and liquidity crisis similar to the one in Kazakhstan, but the economic slowdown that has already started will be long term.
"Although domestic consumption demonstrates pronounced overheating, the slowdown has already started, and several factors show that it is controlled," the analysts wrote.
Morgan Stanley said that locally owned banks in Latvia will be forced to reduce lending more considerably than the Scandinavian controlled ones, since possibilities to attract outside finance will remain low.
"While the relatively strong funding position of the Swedish banks should allow a Kazakh-style credit crunch to be avoided, a long and severe growth slowdown looks inevitable, particularly if Scandinavian growth also slows significantly," the bank said.