RIGA - The first quarter numbers show Latvia’s GDP slumped 5.1 percent against year earlier figures, according to the flash estimate of the Central Statistical Bureau, reports Nozare.lv. This number was better than most economists had expected. Compared to the previous month’s data, however, GDP rose by 0.3 percent.
The latest economic forecast by the European Commission is calling for Latvia’s GDP to fall 3.5 percent for the full year, then to grow by 3.3 percent in 2011. The government’s budget deficit for the year will reach 8.6 percent of GDP, says the Commission, rising to around 9.9 percent next year, in contrast with its previously predicted figures of 12.3 percent and 12 percent respectively.
Signs of stabilization can be seen in the Latvian economy, which is having a positive effect on all three Baltic States economies, stresses the Commission.
A 0.6 percent decrease in GDP is predicted for Lithuania this year, with growth of 3.2 percent to follow in 2011. Meanwhile, 0.9 percent growth is predicted for Estonia in 2010, rising to 3.8 percent in 2011.
The Commission’s report indicates that economic activity in Latvia is gradually improving, with the liquidity situation in the interbank market back at pre-crisis levels by the beginning of 2010, and CDS (credit default swap) spreads falling rapidly, indicating improved market confidence towards Latvia. However, these positive changes have still not led to an increase in lending to the private sector, and lending margins remain well above pre-crisis levels, which are slowing the restructuring of the economy, says the report.
According to the Commission’s estimations, Latvia’s financial sector is well capitalized after an increase in the levels of banking capital; however, the banks are expecting a further worsening of their credit portfolios, and are therefore very cautious about taking on any additional risks.
Retail sales grew slowly at the beginning of 2010, which was connected with significantly reduced prices during the sales period; however, growth in local demand is being affected by the weakness of the employment market, high levels of private debt, and further expected cuts in budget spending. Compared to February, total retail trade turnover in March grew by 2.9 percent. Compared to March 2009, total retail trade turnover in March of this year has decreased by 7.4 percent.
Meanwhile, there has been a healthy growth in Latvia’s export volumes, with a significant recovery of the Latvian export market and an improvement in national competitiveness, and renewed investment is also being noted in the real estate market, according to the Commission’s forecast.
However, the recovery of private investment is being delayed by a lack of clarity over public finances, especially in terms of tax policy, as well as uncertainty over the forthcoming parliamentary elections in October.