Latvian economy shrinks nearly 18 per cent in fourth quarter (Roundup)

Feb 9, 2010, 15:32 GMT

Riga - The economy in Latvia, which has been the hardest hit of all 27 European Union (EU) member states by the global economic crisis, contracted by nearly 18 per cent in the fourth quarter of 2009, compared to the same period a year ago, data released Tuesday showed.

'Compared to the same period of 2008, gross domestic product (GDP) value has decreased by 17.7 per cent,' the national statistics office said.

The fall was led by a startling 30-per-cent drop in the retail sector.

However, despite the scale of the fall, the GDP actually grew by 2.4 per cent compared to the third-quarter figures, suggesting that Latvia's deep recession may have bottomed out.

'Although the fall is still large, its rate is declining and, like most other economic indicators points to a gradual stabilization of the economy,' the Latvian Finance Ministry said in a statement.

Foreign trade turnover for the entire year totalled ay 8.2 billion lats (16 billion dollars), a drop of 31 per cent compared to 2008.

The coalition government of Prime Minister Valdis Dombrovskis has initiated a range of painful reforms including wage reductions, a pensions freeze and big public spending cuts as it battles to rebalance the economy that was overheated by a decade-long boom.

The country now has the highest number of jobless in the EU, with 23 per cent, according to Eurostat figures.

Latvia's economic recovery plan is based on conditions attached to a 7.5-billion-euro (10.3-billion-dollar) loan from international institutions, including the International Monetary Fund, European Union and World Bank.

Figures released Monday showed that Latvia's rate of inflation fell by 3.1 per cent in January compared to the year-ago period, raising hopes that Latvia may be able to adopt the euro in 2014.

While some analysts believe the target is overly optimistic given the size of Latvia's economic problems, others believe the possible accession of neighbouring Estonia to the eurozone in 2011 may smooth the way for Latvia to ditch the lat in favour of the euro.

Latvijas Krajbanka economist Olga Ertuganova said Latvia's economy would remain characterised by recession for some time.

'Although the fall in growth rates will certainly not be as dramatic as in 2009, this year Latvian economy will continue in a recessionary phase,' she said.