Latvia Economy Remains Hot

Associated Press
August 9, 2007

Latvia’s Economic Growth Hits 11.3 Percent in Second Quarter RIGA, Latvia (AP) — Latvia’s economy, the fastest growing in the European Union, grew at an annual rate of 11.3 percent in the second quarter, the statistics office announced Thursday. The result, which is based on preliminary data, surpassed analysts’ expectations and is even higher than first quarter growth of 11.2 percent. The announcement was made hours after the chief of the central bank, Ilmars Rimsevics, acknowledged in a televised interview that Latvia’s economy is overheating due to high inflation and double-digit gross domestic product growth. On Wednesday the statistics office announced that annual inflation based on July data was 9.5 percent, also the highest in the EU. According to Martins Gravitis, spokesman for the Bank of Latvia, the high monthly inflation in July — 1.2 percent — was partly due to a sharp jump in prices for tobacco and non-regulated services such as catering, hotels and financial services. Rimsevics said there was a risk of a further wage-price spiral in which workers, seeing prices grow, demand higher wages. He stressed that the situation was not critical and that the government’s anti-inflation plan, adopted in March but implemented only in July, still needed time to take effect. Some analysts have warned that Latvia’s overheating economy might precipitate a hard-landing, with GDP growth plummeting to 2 percent or less. Gravitis said fiscal policy will be crucial in combatting the situation — namely, balancing the budget this year and creating a budget surplus for 2008. Latvia’s GDP soared 11.9 percent in 2006.