Growth returns but competitiveness remains key
Overview:
After a severe economic downturn, positive y-o-y GDP growth was recorded in Q3 2010 after nine consecutive quarters of contraction. Industrial output, exports and retail sales readings since then suggest that the recovery is becoming stronger and more broad-based. However, unemployment and the private sector debt overhang remain high. With the current account in surplus and FX reserves back to pre-crisis levels the fears of a devaluation of the Lat (tied to the Euro) have receded. “Internal” devaluation via nominal wage cuts and deflation has reduced some of the real exchange rate over-valuation built up in previous years, but not all of it. As domestic demand recovers, fiscal policy will have to be tightened sharply and incomes policy remain restrictive in order that another unsustainable boom is avoided.