Latvian Roses And "Gigantic Error Of Pessimism"?

Latvian statistics blow the mind today. Million miles better than expected :)

Statistics Bureau says:

In the 2^nd quarter of 2009 compared to the same period of 2008 gross domestic product (GDP) value has decreased by 19.6%, according to flash estimate of the CSB*.

In the 2^nd quarter of 2009 decline of economic development continued both in fields of manufacturing and of services. Major volume decreases were observed in retail trade – by 28%, in hotels and restaurants services – by 35%, in industry – by 19%. The drop of value of collected product taxes continues to maintain negative impact on GDP.

Nordea analyst Annika Lindblad responds to it:

According to the flash estimate Latvian GDP extended its decline to 19.6% y/y, less than the -22% y/y expected. This was worse than the -18% y/y in Q1, and was the fifth straight decline in GDP. Considering the level of GDP, however, it rose compared to Q1. The Statistics Office noted that major declines were recorded in e.g. retail sales and on the industrial sector. A more detailed release will be given on September 8.

The prolonged recession in Latvia is expected to continue this year, but the pace of decline is awaited to abate towards the end of the year, with the whole year showing a decline of approximately 18% y/y. The economy has weakened on all fronts, with imports and exports falling, private consumption contracting and investment declining steeply. The recovery of the global economy is expected to support a pick-up in export demand, and the year 2010 is seen as showing a slower decline of 3% y/y.

Latvia has received the second tranche of EUR 1.2 bn from the EU and also the IMF has preliminarily promised to deliver their second tranche of EUR 200 mn, but receiving the funds and ensuring short-term liquidity has required steep budget cuts to be made. The savings have included wage cuts and labor force reductions on the public sector, further hurting private consumption.

Danske Bank closes on with a gloomy outlook anyway:

When taking into account a positive base effect, a considerable deceleration of the downturn is expected for the second half of the year. However, we expect GDP this year to shrink up to 20%. The recovery will depend on the external demand outlook and export-oriented manufacturing performance. There are some signs of stabilisation in Latvian industrial output. In recent months the drop in industrial production has slowed down, but this does not mean a sustained recovery and is more likely to be a one-off factor effect.

We do not expect a significant rebound in growth in 2010, and forecast GDP to decline a further 5-6% y/y on average. On the other hand, in the case of a more visible economic stabilisation scenario we might see a weaker downturn. However, we should take into account fiscal tightening, which will continue next year as well. We expect an additional cut in budget expenditure by LVL500m with the option of an increase in VAT and some other taxes.

The country is still printing a positive year on year change in consumer prices. "Internal deflation" still to come, at least in public sector ...