Q4 GDP results deliver mixed signals

RIGA - Latvia’s economic output shrank a preliminary 17.7 percent in the fourth quarter versus year earlier numbers, its best performance for the year, though worse than many economists had forecast, reports Bloomberg. The drop compares with a 19 percent contraction in the third quarter. A Bloomberg survey of economists was expecting a fall of 15.9 percent. The economy expanded 2.4 percent from the previous quarter.

Lithuania’s GDP for the fourth quarter contracted 13 percent compared to the same period a year earlier. Against the previous quarter, output in the fourth quarter increased by 0.2 percent.
Latvia, struggling with the EU’s deepest recession, may be showing indications of its economy stabilizing as the decline in manufacturing slows. Increased demand for Latvian products in Western Europe’s recovering economies may help it return to growth as austerity measures needed to qualify for an international bailout loan suppress domestic consumer demand. Swedbank economist Lija Strasuna said “The export recovery is continuing, though investment and consumption remain weak.”
Manufacturing turnover for 2009 fell by 27.2 percent, split between a 30.7 percent decline in output for the domestic market and 21.9 percent for export, reports Nozare.lv. Turnover decreased by 0.6 percent in December, compared with the previous month, with a 5.2 percent fall in the domestic market offset by an increase of 5.0 percent in exports.

With the lat pegged to the euro and devaluation not up for public discussion, the government is using a policy of wage cuts and deflation to return the country to competitiveness, though this is impacting consumer spending. Retail sales fell 30.2 percent in December and 29.7 percent for the fourth quarter, while unemployment rose to 16.6 percent in January.
“We expect private consumption and fixed investment to have remained weak in the fourth quarter and stay subdued, especially in the beginning of this year,” said Helsinki based Nordea analyst Annika Lindblad. Exports should start improving as the global economy revives, Lindblad said, noting that even with the recovery, “we see the economy still contracting by almost 3 percent in 2010.”

What should worry all three Baltic economies are reports that Europe’s recovery has nearly ground to a halt in the fourth quarter as waning spending and investment in Germany have unexpectedly stopped growth in the economic bloc’s largest economy. European Union countries are the main trading partners for the Baltics, and the Baltics are relying on them to pull them out of this economic crisis.

GDP in the 16-nation euro region rose 0.1 percent from the third quarter, when it gained 0.4 percent. The recession in Greece has deepened, with GDP falling 0.8 percent in the fourth quarter after a 0.5 percent slump in the previous three months.
European governments are struggling to contain the fall-out from Greece’s budget crisis as they phase out the stimulus measures used to pull the region’s economy out of recession. As market turmoil pushes bond yields higher across southern Europe, the recovery is in danger of losing momentum. It’s “another piece of bad news for policymakers as they struggle to come up with a plan that soothes worries about the credit worthiness of the euro zone’s peripheral economies,” said Fortis Bank Nederland’s chief European economist Nick Kounis, in Amsterdam. The recovery is “continuing, but at a snail’s pace.”
From a year earlier, euro-area GDP declined a seasonally adjusted 2.1 percent in the fourth quarter. For the full year, the economy contracted 4 percent. Separate data showed that industrial production in the region fell 1.7 percent in December, the most in 10 months. The German economy stagnated in the fourth quarter after recording 0.7 percent growth in the previous three months.

Europe’s governments face a growing dilemma as they seek to support recoveries at a time when rising sovereign-debt burdens threaten to hold back expansion. EU leaders ordered Greece to get its deficit under control and pledged “determined and coordinated action” to protect the currency region in a statement that stopped short of setting out concrete steps. With governments phasing out of incentives, and unemployment at 10 percent, the highest in more than 11 years, Europe’s recovery is showing signs of waning.

“The paltry pace of fourth-quarter growth makes it crystal clear that the euro zone economy cannot yet stand on its own feet,” said ING Group economist Martin Van Vliet from Amsterdam, adding that “However, it is premature, in our view, to presume that the recent soft patch in the recovery will persist.”