GDP gains neutralised by steepling inflation

RIGA - Latest statistics

RIGA 's A double blast from Latvia's Central Statistical Bureau shows the good and the bad sides of the Latvian economy. Latest figures show that Gross Domestic Product (GDP) growth for 2007 was an impressive 10.2%.

However, many will interpret the double-digit growth as another sign of an economy with serious overheating problems, a conclusion reinforced by the fact that February's annual inflation figure climbed to a terrifying 16.7%, up 1.3% on January's figure.

Latvia retains the dubious honor of possessing Europe's highest inflation rate 's by a comfortable margin.

The news is especially worrying given that just two days ago, Estonia's inflation rate rose by a more modest 0.4%, suggesting that it is some way ahead of Latvia in the economic cycle. While the worst may be over for Estonian consumers, the worst is probably yet to come for their Latvian counterparts.

Soaring prices for tobacco and dairy products combined with a significant hike in energy tariffs contributed to the steep increase in inflation.

However, there is some room for optimism, according to DnB Nord analyst Ieja Veja, particularly if one looks at quarterly rather than annual trends.

"The economy could not be characterized as overheated anymore, economy is stabilising. GDP growth in the fourth quarter slowed down to 8 percent, compared to about 11 percent in previous three quarters. The pattern of economy is changing - the domestic demand based sectors have all slowed down," she told The Baltic Times.

"Annual inflation in February was a little bit higher than projected. In the next few months a further increase of inflation is quite possible, as the prices of electricity and natural gas are expected to increase in April, but in the second half of year inflation should go down.

"The situation in Latvia seems to me quite similar as to situation in Estonia only slowdown in Estonia has started earlier. Processes are following the same trend but Latvia is lagging a little bit behind, so the 'landing' in both countries could possibly be about the same."