Seasonally adjusted sales were down 4.1 percent in September from August, according to data from the national statistics office last week. The yearly decrease was the biggest since July 1999, when they fell 14 percent.
Increases in retail sales have steadily ground to a halt over the last year as banks have tightened credit producing a rapid slowdown in domestic demand for consumer goods. As far as we can see the retail sales index peaked in April, and now we are steadily heading on down. It is a good moment to ask ourselves, will we ever get back to the April level again? (This is not as silly a point as it might seem, since evidence is mounting that the ageing and shrinking population phenomenon is leading retail sales to peak in one economy after another - see Germany here, Italy here, and Hungary here).
Inflation Falling, But There's Still A Long Way To Go
Latvia's inflation fell for the fourth month straight in September, and was down to 14.9 percent. Monthly inflation over August was at 1.1 percent, due largely to a jump in textile and education prices.
Latvia has had the European Union's highest annual inflation rate for more than a year now, a strange trophy to obtain, this one. Inflation peaked at 17.7 percent in May, and has since been slowing steadily. Indeed if we look at the actual movement of the index, rather than the year on year changes, we can begin to ask another, and even stranger question: at what point will Latvia's inflation move registering positive increases to registering negative ones? That is, when will we move from inflation to deflation?
Possibly for many people this question (like the peak retail sales one) will appear to be almost ridiculous. But it isn't. If you look at the CPI index itself (this now becomes much more important than the year on year inflation rates, since what we need to watch for are the price movements from month to month. In general the rate of increase from one month to another has been slowing, and the September uptick of 1.1 % in the index over August was a bit of an anomaly, since in July the CPI was only up 0.3% over June, while in August it was down by 0.4%. So we should not be surprised to see the index hit a ceiling at some point, and and after that it start to come down, at least temporarily, the extent of the decline will depend on how sharply the Latvian economy contracts in 2009, and just how drastically domestic demand drops back.. Basic economic theory in fact leads us to expect this (on the back of falling commodity and food prices and in a situation where internal capacity is way above the sum of internal and external demand available to the Latvian economy at current prices). Thus there is only one way for prices and wages to go (at least in the short term): down. Although people may struggle with all this yet awhile before they accept the inevitable.
Latvian unemployment is now slowly creeping up. In September there were 57544 Latvians registered as unemployed. In comparison with August the number of unemployed increased by 1311, and the Latvian State Employment Bureau are now forecasting that the unemployment rate - which now stands at 5.3% using the persons registered methodology - will reach 8 percent next year.
Bleak Outlook
Latvia's economy clocked up a 10.5 percent growth in gross domestic product in 2007, following 11.9 percent growth in 2006. Since that time Lativia's economy has turned sharply downward, with GDP expanding only 0.2 percent during the first six months of 2008 - down from 10.2 percent over the same period in 2007.
And the future seems to be even more bleak with the IMF forecasting that Latvia's gross domestic product will decrease 0.9% in 2008. Only Ireland and Estonia are forecast to see their GDP contract by more than Latvia – by 1.8% and 1.5%, respectively. The IMF also expects that Latvia's GDP will shrink another 2.2% next year.
The IMF also expect inflation to remain high in Latvia. According to IMF estimates, annual inflation in Latvia could reach 15.3% this year, 10.6% in 2009 and 6.7% in 2007. On the other hand, they expect the current account deficit to decrease to 15.1% of GDP this year and 8.3% in 2009.
Latvia needs to cut spending in next year's budget to avoid rising loan costs as turmoil in financial markets drives up borrowing rates, central bank Governor Ilmars Rimsevics said in Dienas Bizness.
``The global financial crisis has strongly dried up the flow of money: borrowing abroad for a reasonable price has become practically impossible,'' Rimsevics wrote in an Ed-op piece for the Riga-based newspaper.
The central bank forecasts growth between zero and 0.5 percent next year, which would widen the budget gap to as much as 4 percent. Rimsevics also said that Latvia may end next year with a fiscal deficit of 5.5 percent of GDP, in an interview with Leta newswire today. A shortfall that size would be ``unacceptable" he said accusing the Latvian government of having given up trying'' to cut spending. As can be easily imagined, Rimsevics song, when coupled with an IMF forecast of an 8.3% CA deficit for 2009, will be like sweet music to the ears of the global investment community at this point.
It is thus hardly surprising that Fitch Ratings recently cut Latvia's credit rating to BBB from BBB+, the second lowest investment grade, citing a deterioration of the European economy.
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