Slide halted but rebound not yet clear

RIGA - Latvia’s third quarter economic output was slightly worse than analysts expected, with GDP dropping 19 percent against year earlier figures, according to the Central Statistics Office, reports news agency LETA. Analysts were looking for a contraction of 18.4 percent. Second quarter output fell by 18.7 percent. The Latvian economy is the worst performing in the European Union as consumer spending has slowed along with manufacturing activity.

The country, which had the fastest-growing economy in the EU in 2006, has been hard hit as excessive consumer spending and a speculative property boom turned to bust, exacerbated by the global crisis, reports Bloomberg. A group led by the International Monetary Fund and the European Commission had to step in with a 7.5 billion euro loan package to support the government, which was forced to take over the nation’s second biggest bank, Parex, last year and is facing massive budget deficits as the economic slide continues.

“There are some signs that the precipitous decline of the Baltic economies might be bottoming out,” said Fitch Ratings in a recent report. “However, it is too early to judge [if] a sustainable rebound has started. Nevertheless, there are signs the macroeconomic re-balancing needed to correct the excesses of the boom is taking place.” The GDP drop, year-on-year, was most affected by decreases in retail trade - down by 28.7 percent; transportation and communications - by 18.2 percent; manufacturing - by 17.4 percent; and construction - 36 percent. Third quarter retail sales, however, were down 6.7 percent, compared with the second quarter. Industrial production rose 0.5 percent in the third quarter, compared with the second quarter, on a seasonally adjusted basis.

Analysts say that Latvia’s economic weakness threatens to slow a banking recovery in Sweden, where Swedbank and SEB remain the two biggest lenders in the Baltic region. Swedbank on Oct. 20 said it suffered a 3.3 billion kronor (320 million euro) net loss in the third quarter, after loan losses rose to 6.1 billion kronor. Swedbank’s Baltic gross impaired loans made up 71 percent of its total at the end of September, says its interim report. The economies of the three Baltic states however are shrinking at a slower pace, on a quarterly basis. Lithuania reported 6.1 percent growth in the third quarter compared with the previous quarter. The Latvian economy, which has shrunk for six consecutive quarters, is expected to start growing in the second half of 2010, say central bank estimates.