While the Latvian economy is doing well at the moment, the numbers have been showing possible dangers in the future. First, Latvia has been importing almost twice as much goods as exporting, for last few years, and paying for that by money borrowed from abroad. The common sense suggests that foreign banks will not be willing to lend ever-increasing amounts of money to Latvia forever. Second, for last year, the Latvian economy has been growing at 11%/year, while industrial production has been growing at 1%/year. Most of the economic growth has come from selling things one to another, financed by borrowed money, rather than actually producing something. Again, by common sense, this cannot last for long.
The most recent numbers suggest that the first of these two trends is now correcting. In November, Latvian exports grew by 24.8% while imports grew by only 4.8%. Here is the graph (red line is the import growth, blue is the export growth):So, Latvian trade deficit is finally shrinking and substantially. It's still huge, though, and it will take several years until it gets reduced to a more reasonable number.
The second set of numbers, also released this week, is less encouraging. The industrial production grew only by 1.1% in November, compared to last year. The average for January-November 2007 is 1.0%/year. So, it's not clear for how long the rest of economy can keep growing at a much faster speed...
The puzzle is how all those numbers fit together. On one side, we have
- industrial production: +1.1%
- imports: +4.8%
- retail sales: +11.2%
- exports: +24.8%