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Latvia: Economy is starting to stall
Wed, May 7 2008, 15:21 GMT
by Danske Research Team
• Growth slowed significantly in Q4 to 8.0 % y/y compared to almost 11% y/y in Q3 07. We downgrade our expectation for growth to around 2-3% y/y for 2008 and some 2% y/y for 2009.
• The main driver of the slowdown is domestic demand; the retail trade dropped significantly and property market has cooled further.
• Over the current and coming years growth should mainly be stimulated by exports. But taking into account the huge uncertainties regarding the global outlook and the current Latvian export structure (around 70% of exports are to the EU), robust export performance may look much too optimistic.
• Latvia's inflation rate accelerated further in March to 16.8% y/y from 16.7% y/y in February and we expect it to rise further in 2008, mainly due to one-offs such as hikes in electricity and gas prices. We expect inflation to average 17% y/y in 2008 and 10% y/y in 2009. • Since 2004 the ratio of domestic credit to GDP has more then doubled, but currently we are seeing a significant deceleration in credit growth, due to tighter credit conditions. We expect this trend to continue.
• Latvia's economy is slowing rapidly and a budget surplus of 1% of GDP in 2008 now seems unlikely, however no additional stimulus from the fiscal side is desirable because the economy is moving to a more stable path.
Published on Wed, May 7 2008, 15:23 GMT
Danske Bank
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