'Dawdling' reforms threaten recovery

RIGA - This year Latvian GDP will fall by 2.5 percent, but by next year real GDP could grow by 4 percent, say predictions by Swedbank economists, reports Nozare.lv. As the bank’s chief economist Martins Kazaks explains, the predicted 4 percent rise in GDP is according to the “dawdling scenario,” but if the government carries out structural reforms and improves the business environment, the level of growth could be higher. “The decrease last year was very substantial, and this year we will not manage to regain our losses, but in 2011, with the return of domestic demand, GDP could grow by around 4 percent,” said the expert.

Kazaks is sure that an improvement in the economic situation can be expected this year, partly due to the fact that the fall in some sectors has been excessively large, and will now be followed by a swift rebound effect. He believes, however, that residents will not be satisfied by a mere 3 - 4 percent growth over the coming years. “That will be too slow, and people will [continue to] decide to leave Latvia, which will create even deeper structural problems for the future of the economy,” indicates the bank’s chief economist, adding that a GDP growth of 10 percent over the next three years would also be undesirable, as that would also lead to a lack of balance.

At the same time, Kazaks believes that the recession in Latvia has already ended in the first quarter of this year, and future figures will indicate pluses in comparison with previous quarters; however, positive year-on-year growth may only start to show in the fourth quarter, which will not be enough to compensate for the rapid fall in GDP last year, meaning that year-on-year, the economy will show a fall of 2.5 percent.
Stabilizing household deposits along with recovering retail trade in Latvia is “surprisingly strong,” indicating an increase in the share of the grey economy, the report said. The decline of Latvian retail sales slowed to 13.3 percent in February, the slowest decline since October 2008.

This optimism could be tempered by initial estimates released last week by the Economy Ministry showing Latvia’s GDP fell 5 percent year-on-year in the first quarter of 2010. However, as government ministers were informed by the Economy Ministry’s Economic Structural Policy Department Director Olegs Baranovs, a positive tendency could be noted when compared with the figures from last quarter.
The ministry predicts that the drop in GDP will continue in the second and third quarters of this year, but growth is predicted for the fourth quarter. Altogether, a drop in GDP of 3 percent is being predicted for 2010, which is one percent more optimistic than previously forecast. GDP will grow by 2.5 percent in 2011, the ministry predicts.