RIGA - Retail sales have continued to fall in Latvia as consumers become thriftier and their wild optimism of yesteryear simmers.
The national statistics office announced on April 30 that retail sales in the first quarter dipped 1.1 percent year-on-year, while March sales were down 3.4 percent compared to the same month last year. Food stores saw their sales drop 4.8 percent from March to March.
Analysts said Latvians are learning anew to spend money more prudently and select cheaper items.
"Residents have become much more cautious in their spending…They have started to assess prices that earlier they paid no special attention to. The source 's the real estate market, which contributed huge cash flows to the economy 's has dried out," said Dainis Gaspuitis, an economist at SEB Unibanka.
He said for the longest time Latvian consumers thought their purchasing power had no borders and that the good times would last forever.
Now, however, consumers are waiting for the best bargains, and retailers who take advantage of this will survive, while those who hold onto their higher prices will ultimately suffer, Gaspuitis said.
As Martins Kazaks, chief economist at Hansabanka, explained, "It is important to point out that the decline [in retail sales] was in foodstuffs, meaning that inflation considerably affects both the amount of demand 's as salary growth slows and inflation remains high and actual income and spending capacity decline 's and its structure, as the residents choose cheaper products."
What's more, he added, there is a palpable uncertainty about the economy, both in Latvia and globally.
For three years Latvia boasted the fastest growing economy in the European Union, with GDP expansion reaching 11.9 percent in 2006, but in the second half of 2007 the rate of growth started to decline after the government enacted a tough anti-inflation plan.
Forecasts for 2008 growth vary wildly, in large part to the external factors such as energy and commodity prices that are beyond Latvia's control.
Kazaks predicted retail sales would continue falling.
"Considering that the consumer optimism indicator… declined in April again, retail sales growth will be negative in the upcoming months," he said. "Given the exaggerated optimism a year ago, the decline of retail sales is natural."
Speaking more theoretically, Estonia's Mart Laar, a former prime minister and a well known advocate of open market, said Latvia was headed for a "tough hangover."
"Latvia's government in the course of several years was very optimistic 's GDP growth at 12 percent and a budget deficit 's this is a cocktail that I would advise anyone to drink," he told the daily Diena in an interview. "And now you're paying for it."
Laar said the worst mistake was failing to compile a budget with a surplus, which is "very bad."
"Judging by what I've heard and what politicians say, Latvia understands what it has to do," he concluded. "And if you'll do it fairly well, then your problems will not be catastrophic."
Meanwhile, Maris Lauri, an analyst with Hansabank Markets, forecast that economic growth in the Baltics should rebound starting 2010.
"The worst period will probably be this summer in Estonia, the winter of 2008-09 in Latvia and the year 2009 in Lithuania," he said on May 2.
Lauri said that the bank has reduced its forecasts for all three countries. "We brought down the forecast for Estonia and Lithuania equally, respectively from 5 percent to 3.5 percent and from 7.5 percent to 6 percent." Latvia's forecast was reduced from 6 to 4 percent.
