GDP gains neutralised by steepling inflation

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

However, many will interpret the double-digit growth as another sign ofan economy with serious overheating problems, a conclusion reinforced by thefact that February's annual inflation figure climbed to a terrifying 16.7%, up1.3% on January's figure.

Latvia retains the dubioushonor 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 bya 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 yetto come for their Latvian counterparts.

Soaring prices for tobacco and dairy products combined with asignificant hike in energy tariffs contributed to the steep increase ininflation.

However, there is some room for optimism, according to DnB Nord analystIeja 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 to8 percent, compared to about 11 percent in previous three quarters. The pattern of economy is changing - the domestic demand based sectors haveall slowed down," she told The Baltic Times.

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

"The situation in Latvia seems to me quitesimilar as to situation in Estonia only slowdown in Estonia has started earlier.Processes are following the same trend but Latvia is lagging a little bitbehind, so the 'landing' in both countries could possibly beabout the same."