The drop in gross domestic product, the largest since quarterly annual records began in 1995, compares with a revised 5.2 percent drop in the third quarter.
Industrial Output Keeps Falling
Latvian industrial output declined by a working day adjusted 14.2% year-over-year in December, after falling 13.9% in November. Manufacturing was down 18.2% on an annual basis, while mining and quarrying production were down 10.6%. Month on month, industrial output dropped a seasonally adjusted 2.5% in December, compared with a 3.1% fall in the previous month.
Over the fourth quarter, industrial output decreased 6.3% over the third one and was down 12% from the previous year. In 2008, industrial production fell 6.7% compared to the previous year. At the same time, manufacturing output dropped 8.3%, while mining and quarrying output rose 2.4%.
Exports Fall Again In December
Latvia's trade deficit - at LVL 226.8 - was up in December over November, when it had been 210.5 million. Exports were down by 4.6% over November and by 11.1% over December 2007. Imports were up by 0.4% over November, and down by 15.2% over December 2007.
Exports Month on Month: the most rapid increase was in fish exporst (up by 22.5%), meat and fish products (up by 15.3%), tobacco products (up by 14.5%), (alcoholic and non-alcoholic beverages (up by 12.7%), pharmaceutical products (up by 20.5%), machinery and mechanical appliances (up by 18.1%). Exports fell in the following categories: rubber and articles (by 35.5%), iron or steel and their products (by 13.3%), wood and wood products (by 19.6%), furniture, bedding and lighting equipment (by 15.8%), clothing (stiched by 20.6%, unstitched by ).
Exports year on year: exports increase of cereal crops (exported mostly to Denmark, Morocco and Yemen) (3.3 times), alcoholic and non-alcoholic beverages (by 33.5%), essential oils, perfumery and cosmetics (by 45.5%), machinery and mechanical appliances (by 24.4%). There were declines in the export of iron and steel (by 54.5%), motor vehicles (including rail transport) and parts thereof (by 34.6%), rubber and articles thereof (by 41.4%), wood and wood products (by 39.3%), furniture, articles of bedding and lighting equipment (by 32.8%).
Imports month on month: unstitched clothing imports were down over November (by 34.9%), rubber and articles thereof (by 23.9%), mineral fuel, oil and refined petroleum products (by 16.3%). There were import increases in iron and steel (by 74.1%), machinery and mechanical appliances (by 31.2%), motor vehicles and parts thereof (by 15.8%), pharmaceutical products (by 24.1%), on vegetable and animal oils and fats; waxes (by 56.8%), meat and fish products (by 10.1%), coffee, tea and spices (by 8.0%).
Imports year on year: the most notable annual decrease was in imports of wood and wood products (by 63.0%), of motor vehicles and parts thereof (43.6%), articles of iron or steel (by 36.4%), rubber and articles thereof (by 30.0%), of electrical machinery and equipment (by 27.3%), unstitched clothes (by 23.0%). Imports of pharmaceutical products increased (by 40.9%), fish (by 25.3%), meat and offal (by 20.0%), meat and fish products (by 10.8%).
During the fourth quarter as a whole Latvia's foreign trade deficit hit a total of LVL 692.1 million - LVL 100 million less than during the third quarter. Imports totalled LVL 1.6898 billion and exports LVL 0.9977 billion. Since during the third quarter the respective figures were LVL 1.9761 billion and LVL 1.1822 billion, both imports and exports fell between quarters.During 2008 as a whole foreign trade turnover - at current prices - was up 0.3% or by LVL 31.5 million when compared with 2007. Exports grew 8.7% or by LVL 351.7 million and amounted to LVL 4.392 billion, whereas the volume of imports was down 4.1% or by LVL 320.2 million and totalled LVL 7.46 billion. Total foreign trade turnover at current prices in December 2008 reached 819.4 mln lats – less by 12.3 mln lats or 1.5% than a month before and less by 130.7 mln lats or 13.8% than in December 2007, according to provisional data of Central Statistical Bureau data.
Inflation Still A Big Problem
Compared to December 2008 the average consumer price level in January 2009 was up by 2.2%. The average prices of goods rose by 2.1%, but of services - by 2.3%. In January prices of goods and services grew almost in all main commodity groups (except clothing, footwear and fuel), but the main influence was the tax change. Price growth of housing services, tobacco products and vegetables had the greatest impact on the price increase.
Price increases in food (+3.5%) were mainly influenced by the rise of value added tax (VAT), moreover, due largely to seasonal factors the prices of vegetables and fruit went up by 12.8% and 4.4%, respectively. Prices of alcoholic beverages on average increased by 3.3%, and that was mainly influenced by the ending of sales campaigns, while the growth in tobacco product prices (+7.0%) was influenced by the growth of excise duty.
The VAT change influenced the prices of water (+16.3%), sewerage (+16.8%), refuse collection (+16.6%), electricity (+4.6%) as well as pharmaceutical products, books, newspapers and periodicals. Price increases were also recorded for heating, natural gas, pet food, individual care goods, non-durable household goods, passenger transport services, housing maintenance services, catering services and outpatient services.
Due to continuation of seasonal sales campaigns, clothing (-5.7%) and footwear prices (-7.0%) decreased. Fuel prices on average decreased by 4.9%. Compared to January 2008, consumer prices increased by 9.8%, of which prices for goods increased by 8.9%, and for services by 12.2%. The annual average rate of change in 2008 was 14.9%.
Basically it is hard not to form the opinion looking at this price data that, given the presence of a currency peg, and the need to lower prices rapidly to get exporting, that the VAT raise was a very bad decision indeed, since it both weakens domestic consumption further and keeps inflation running at quite a high level, something which makes wage reductions very hard to swallow.