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Friday, February 8, 2008

Latvia's GDP Q4 2007

Latvikas Statistika have just released a flash estimate for GDP growth in the 4th quarter of 2007. According to this data Latvia's economy expanded in the fourth quarter at the slowest pace since March 2005 growing by 9.6 percent. Still since this is still probably the fastest rate of expansion in the European Union, - and compares with 10.9 percent in the third quarter - it is not an especially useful data point for those of you who are interested in the finer details of things, and in particular for those of you who want to know whether or not the Latvian economy is going to "enjoy" a hard or a soft landing.

Another approach to this process would be to look at the quarter on quarter changes in GDP. During the 3 quarters prior to Q4 Latvian GDP has grown at 2.4, 2.7 and 2.8% respectively. That is, in Q3 growth was still accelerating slightly. Now we have no figure for Q4 yet, but doing some quick mental arithmetic, my guess is that q-o-q growth will come in around 1.5/1.6%, provided the original flash estimate is confirmed. Now this deceleration is quite fast, but it still isn't enough to tell us what kind of landing we will have with any high degree of certainty (as opposed to what my guts tell me). Look at the chart a moment.

Well, we can certainly see that the cycle has peaked, and the slowdown is certainly sharp, but look at the chart a bit harder, and you will see that after Q4 2002 there was another sharp slowdown, but in Q3 2003 there was a rebound. That is what the people who argue there will be a soft landing this type hope will be repeated. My view is that I don't see how this can happen with the Lat at its current high values, since to get export let growth, export prices in euros will need to be brought back down from where they will be once all that inflation is effectively "bled" out of the system.

What I do think though is that we need to see the reading on GDP for the next quarter. Unless there is a complete fudge in the data, my guess is that we will be able to say definitively at that point.

Which means we should know definitely one way or another on or around 8 May 2008. Those of you of a nervous disposition might like to take up knitting or crochet in the meantime.

1 comment:

hcpi said...

"Credit raters and international financial institutions have warned that the economy risks a sudden recession because of soaring price growth."

strongly agree on this point as macroeconomic risks and disbalances are increasing. Besides, flash estimate is rather poor proxy for estimation of "turning points". Latest data shows big drop in consumer spending, industrial production is dropping like a rock, competitivness is weakening and will continue, world markets are heading into recession. It's hard to find any positive trends in the future.