Analytics, Financial Services, Latvia

Dainis Stikuts.

According to the Statistical Bureau, these are just preliminary data; official data on GDP growth in the first quarter will be announced on June 9.

Compared to the rapid GDP growth over the past several years, a 3.6% increase marks a significant fall in the GDP growth pace.

As Hansabanka senior analyst Dainis Stikuts pointed out in an interview to LETA, the significant decrease in GDP growth at the beginning of this year is not surprising. However, the growth is smaller than experts expected.

"It can be almost certainly asserted that the growth is advanced by exports only. Domestic demand is, most probably, decreasing. This concerns investments the most, because in the domestic demand sectors there are no longer such profit opportunities as before, Latvia's industry is in a pitiful situation," Stikuts explains.

Stikuts also points to high inflation and the decreasing private spending.

It is likely that, after receiving a more in-depth information, Hansabanka will cut its GDP growth projection for this year.

"Such a shift of economy is inevitable, as the basis for Latvia's development has to be formed by industry and export, not by domestic consumption. Therefore we should not hesitate to stimulate export and production, as it will help to improve the situation," Stikuts emphasizes. "The government should learn from its mistakes, in this exact period of time the fiscal policy should not be pro-cyclic, meaning that it should not enhance the cyclic economic fluctuations. This year we should not strive to reach the budget with a surplus by all means possible."

As reported, last year GDP in Latvia grew by 10.2%.

In the fourth quarter last year, Latvia's GDP increased 8% year-on-year, whereas in 2006, Latvia's GDP increased 11.9% , compared to 2005. It was the largest GDP growth in the history of Latvia since regaining independence.