The Latvian Economy - March 2, 2012
Economic growth continues, but Latvia is not immune to euro zone problems
- In the fourth quarter of 2011, Latvia experienced the strongest economic growth in the European Union. Latvian GDP rose by 5% in annual terms, leaving behind both Lithuania and Estonia. Is the Latvian economy immune to euro zone problems? Of course, not…
- As expected, economic growth is slowing in Latvia. Still, confidence remains quite robust, and exporting sectors showed good results in the fourth quarter of 2011 despite a quarterly GDP fall in some of Latvia's main trading partners. Economic sentiment indices and the collection of tax revenues in January-February 2012 suggest that economic activity has continued to rise, but most likely at a slower pace.
- Further developments will depend on how much demand for Latvian exports will weaken. Household consumption and investment dynamics will rely on the performance of exporting sectors (manufacturing, tourism, and transport). Under the baseline scenario, we expect economic growth in 2012-2013; however, uncertainty continues to be the name of the game. It is thus useful both for the public and private sectors to have action plans for several scenarios and to remain flexible. And it should also be borne in mind that, even if growth continues, it will not per se solve many of the existing problems in the economy, including inequality, too-slow job creation, skills and regional mismatches, and the diminishing and aging population.