RIGA - The Latvian Economists' Association has predicted that the country is in for a long-term recession, with the economy contracting by more than 5 percent throughout the next few years.
The economy will shrink by 0.2 percent over the course of 2008 and by about 5 percent in 2009, the association said in a press release following its autumn session.
"The GDP drop will be brought about by the interaction of such factors as a decrease in household demand, a reduction in domestic services, the financial situation of businesses and unemployment," the press release said.
The release said that banks would follow increasingly conservative lending policies, while demand on key exports was also likely to decline, both of which would also contribute to slower growth rates.
The announcement came on the heels of a report issued by two of Latvia's most high-profile economists which said that the country would not see growth rates return to normal until some time in 2010.
In that report, titled "Stagflation in Latvia: How Long, How Far, How Deep," Alf Vanags and Morten Hansen said that the country had "entered a recession." The economists said that the country could face the largest economic crisis since regaining independence.
"It is rather clear, even to the most optimistic officials and bankers, that Latvia is facing at best a period of stagflation and at worst a full blown recession the like of which has not been experienced in post-Soviet Latvia," the report said.
The report said that GDP growth would drop drastically, reversing some of the gains the country has made since joining the EU in 2004.
"Evidence from international experience suggests that the cumulative loss from a recession might be the equivalent of two years of double digit GDP growth relative to trend. â€¦ This loss of potential GDP is a setback for the prospects of Latvian convergence," it said.
"Latvia at various times during 2007-2008 has held the EU 'record' for inflation, current account deficit, credit growth, wage growth and GDP growth and it now seems set to claim yet another record: for the largest annual drop in the GDP growth rate," Hansen and Vanags wrote in their paper.
The two economists, who work with the Baltic International Centre for Economic Policy Studies (BICEPS), said that while GDP growth would hit a low point over the course of the next year, inflation would also continue to fall.
"It is likely that inflation has indeed peaked 's the slowdown of the economy and thus the unwinding of overheating in the labor market should suffice for that conclusion," the report said.
However, the economists also pointed out that any fall in the inflation rate was bound to result in increased unemployment 's something that the Baltic state has so far had few problems with.
"A very tentative conclusion might suggest relatively rapid disinflation but this hinges, crucially, on stable inflation expectations and rapid wage disinflation. Moreover, the Phillips curve analysis suggests that disinflation will be accompanied by rising unemployment," the economists said.
Though Latvia had seen double digit growth rates and for years boasted the strongest growth in the EU since joining the bloc, the economy began to crash this year. The country's GDP only grew by 1.5 percent in the first quarter of this year, and fell to a further 0.1 percent growth in the second quarter. In 2007, the Latvian economy grew 10.3 percent.