RIGA - Latvia's economy finally hit the widely predicted economic hard landing, as recent statistics indicate economic growth has dropped to near zero while inflation remains high.
The statistics office announced Aug. 8 that GDP growth for the second quarter of 2008 had plummeted to a mere 0.2 percent compared to the same period last year. Inflation, meanwhile, sank by approximately one percentage point but remains high at 16.7 percent 's down from 17.7 percent in June.
The high inflation combined with low growth 's a phenomenon commonly referred to as stagflation 's has prompted some analysts to herald an oncoming recession.
"The fact that GDP growth in the second quarter was 0.2 percent is not surprising; it only confirms that the economy is in recession," Hansabank's senior analyst, Dainis Stikuts, was quoted as saying by the Baltic Course .
"It [the recession] is proven [to exist] by the data from the retail and industry sectors, as well as the monetary data 's the amount of money in circulation, as well as the broad money 's the volume of deposits in banks," the analyst said.
The sharp drop in GDP growth, down from 10.2 percent at the end of last year, indicates that the widely predicted hard landing has finally arrived. The low numbers also indicate that Latvia may be facing negative growth rates by the end of the year.
"In the second quarter of 2008 the slowest economic development in recent years was observed," the statistics agency said in its economic report.
The statistics agency said, meanwhile, that the inflation was mainly due to the increased cost of services and higher food prices. Total inflation in July was 0.3 percent.
EU-wide inflation statistics had not yet been released when The Baltic Times went to press, but representatives of the national statistics agency said it is very likely that Latvia's inflation is still the highest in the bloc.
Representatives of the Bank of Latvia were predictably hopeful that inflation would continue to fall in the coming months.
"Considering the slowdown of Latvian economic development, as well as comparatively steep price rises in the second half of 2007, the inflation reducing trend will be retained. A slight deflation of the prices could be possible as a result of seasonal food price changes, as well as the reduction of oil prices, which started recently," Bank of Latvia spokesman Kristaps Otersons told the Baltic News Service.
Inflation was primarily driven on by a 1.1 percent increase in the cost of services in July. Transport services were the hardest hit with a 6.6 percent increase in consumer prices.
The highest overall increase in the price of goods hit alcoholic beverages and tobacco, which has seen an astounding 35.8 percent 12 month inflation rate. This was partially balanced out, however, by a 9.6 percent drop in the cost of clothing and footwear.
Reversing the downward spiral of GDP growth will present its own challenges. Stikuts said that in his view, the only way to accomplish this is by continuing to improve the country's exports and by encouraging consumer spending.
"However, only [increasing] the exports will not be able to ensure resumption of a rapid economy growth. Economic growth will only be possible when the consumers start to spend more again," Stikuts said.
The most recent date on the current account balance is also worrying, and indicates that Latvia may not be able to export its way back into positive GDP growth.
In June 2008, Latvia's already low export rate dropped by 3.6 percent from the previous month 's primarily due to a sharp drop in exports of vodka, wood, iron and non-allow steel, and chocolate. While exports were up by a little bit more than 3 percent over the 12 month period, it is still unlikely to be enough to save the Latvian economy on its own.
Imports increased slightly in June 's rising by 1.8 percent over May 's but over the 12 month period have dropped by nearly 8 percent.
The statistics agency, meanwhile, blamed the sharp drop in GDP growth on faltering retail sales and a "recession" in industry.
"Recession of industry and retail trade value added is the reason for rate decrease of economic development," the agency's report on GDP said.