• The Latvian Statistical Office this morning published its flash estimate of Q209 GDP data. GDP dropped 19.6% y/y down from -18.0% y/y in Q1 09. The number was better than we and consensus had expected.
  • The development of the Latvian economy in the first half of 2009 has been slightly above our base scenario. However, the risk of a deep recession with a fall in GDP of up to 20% y/y on average this year still is high.

Details

The Latvian statistical office released its flash estimate on GDP growth in Q209 today. GDP dropped by almost 20% y/y down from -18.0% y/y in Q1 09. The number was better than the consensus expectation of -22.0% y/y and our expectation of a drop of almost 25% y/y.

Assessment & Outlook

We have not seen the details yet, but we believe that the continued contraction in growth is broad based. Retail sales fell almost 30% y/y and industrial production around 20% y/y in Q209. The unfavourable labour market conditions and fiscal austerity measures resulted in a steep slump in private consumption.

Furthermore, higher unemployment which usually lags economic activity and a further drop in wages will have a negative effect on disposable income and consumption growth. Private investments will continue their free fall as real estate market performance (and expectations) remains negative. Investment performance is limited by the still tight credit conditions in all Baltic states.

When taking into account a positive base effect, a considerable deceleration of the downturn is expected for the second half of the year. However, we expect GDP this year to shrink up to 20%. The recovery will depend on the external demand outlook and export-oriented manufacturing performance. There are some signs of stabilisation in Latvian industrial output. In recent months the drop in industrial production has slowed down, but this does not mean a sustained recovery and is more likely to be a one-off factor effect.

We do not expect a significant rebound in growth in 2010, and forecast GDP to decline a further 5-6% y/y on average. On the other hand, in the case of a more visible economic stabilisation scenario we might see a weaker downturn. However, we should take into account fiscal tightening, which will continue next year as well. We expect an additional cut in budget expenditure by LVL500m with the option of an increase in VAT and some other taxes.