Mixed signals show continued weakness

Latvia’s GDP, at constant and seasonally unadjusted prices, grew by 13.4 percent in the second quarter of 2010, compared with the first quarter, reports Nozare.lv. However, a fall of 3 percent was still registered year-on-year, according to a flash estimate by the Central Statistical Bureau. The second quarter of 2010 showed a 14 percent year-on-year increase in the industrial sector output, while the construction and service sectors continued to shrink.

Seasonally adjusted figures show a 3.9 percent year-on-year fall in GDP in the second quarter, but an increase of 0.1 percent compared with the first quarter. More precise and extended information on the GDP increase in the second quarter of 2010 will be published on Sept. 8.

Nordea Senior Economist Andris Strazds says these results mean that it can safely be said that the so-called ‘lowest point’ for the economy is already half a year in the past, and the economy is slowly starting to recover from the huge fall experienced in 2009.

 “At the same time, the data seem internally inconsistent,” he points out. “It is not clear how the comparison with the first quarter is calculated, as considering the previously published seasonally adjusted figures and the year-on-year fall, GDP for the second quarter should show a growth of 1.1 percent compared with the first quarter, and not 0.1 percent, as indicated in the information released by the Central Statistical Bureau. Such growth would also correspond more with previously reported data, for example regarding retail turnover, which showed considerable growth in the second quarter compared with the first,” noted Strazds.

The second quarter data also more or less confirm the predictions made by Nordea that the economy could shrink by around 2 percent this year, compared with last year; however, the reason for this is the relatively high GDP figures for the first half of 2009, as GDP figures continued to fall substantially in the second half of the year, added the senior economist.
Consumer price inflation in some areas continues to be evident. The rise in prices already observed over recent months continued in July, when deflation over the year was reduced to 0.6 percent, according to Central Statistical Bureau data. Consumer prices of goods increased by 1.1 percent year-on-year, while prices of services fell by 4.8 percent.

Compared with June, consumer prices in July increased by 0.2 percent, with a 0.2 percent increase in the prices of goods, and a 0.1 percent increase in the prices of services. The biggest impact on consumer price changes in July came from price increases for food, as well as goods and services related to housing, and price decreases for clothing and footwear.
For the last 12 month period, the average consumer price level fell by 1.6 percent, compared to the previous 12 month period.

Danske Bank has raised Latvia’s economic growth forecast, taking into account the data for May and June. Chief Baltic analyst Violeta Klyviene said in a report that GDP contraction was projected at 3.5 percent this year. Next year, Latvia could see a 1.5 growth rate, which will further increase to 3.1 percent in 2012.

The report notes that economic recovery in Latvia will depend greatly on the growth in exports. A weak labor market will remain the biggest challenge for the Latvian economy in the medium term. It is possible that the unemployment level will only reduce if emigration from Latvia increases, and wages in Latvia may continue to decrease for several years yet, the report says.

Due to weak domestic demand, there is a large surplus in Latvia’s current account, a trend that is likely to continue for quite some time, the bank’s analysts believe.