Nordea Markets: Latvia is moving towards brighter times
By admin at 7 September, 2010, 1:24 pm
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Nordea Markets writes in its new economic outlook that the pick-up in Latvia’s economy has so far been fairly modest, but the cycle seems to have bottomed.
Latvia’s economic recovery continued in Q2, with GDP growing quarter-on-quarter for the second consecutive quarter. Exports have so far been the main driver of the recovery, as expected, with Latvia benefiting from the recovery in the other EU countries as well as Russia.
The domestic economy is seen improving in the second half of the year, although consumption is likely to remain weak due to the still elevated unemployment, the tight credit markets and the weak income development.
Nevertheless, the improving consumer confidence indicates that domestic demand is on the recovery track as well. We see the economy returning to year-on-year growth in 2011 on improving exports and strengthening consumption, with growth gaining further momentum in 2012. However, it will take years for the economy to reach the levels seen a couple years back.
Latvia has currently no need to draw all the available funds from the international loan package, which stabilises confidence in the economy. Latvia has already accumulated some reserves from the loan but retains the option of drawing more funds if the economy deteriorates further.
The stability of the government finances has taken the pressure off the currency as well as the government. In the second half of the year the main event is the parliamentary elections in early October. The party of the current PM is doing relatively well in the opinion polls despite the tough austerity measures already taken. In addition, the likely lack of unpopular decisions to improve state finances before the elections coupled with the strengthening recovery could boost support further. The new government will formulate the 2011 budget, but with the economy on a recovery track the government is expected to try to continue cutting the deficit as planned over the next couple of years.
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