Analytics, Economics, Financial Services, Inflation, Latvia

Swedbank economists Martins Kazaks and Lija Strasuna, presenting the new report yesterday, indicated that Latvia's economic growth in the first half of 2010 was based on a rise in exports and companies renewing their reserves, as well as stabilization of consumer prices with the slow increase in employment and incomes, writes LETA.

"Latvia has survived the recession, but much work remains to be done to make the recovery strong and enduring; moreover, new challenges will appear after the end of the recession, and these will have to be met," warned Kazaks.

The Swedbank economist believes that the country is still at risk of falling into the same trap as before, as the unbalanced labor market could create rising inflation and the same problems with competitiveness as several years ago.

Companies are complaining more and more frequently of the difficulty of finding suitably qualified specialists, despite the high unemployment rate. This situation could lead to salaries rising faster than productivity, with economic growth increasing the demand for skilled labor which the market is unable to provide.

Kazaks notes that competitiveness has been improving over the past six months; however, once the means of cutting expenses have been exhausted, increased competitiveness will have to be based on an increase in productivity.

The economist stresses that the lesson to be learnt by the private sector from the recent bubble is that wage increases should be balanced by an increase in productivity. This also relates to the public sector, where salaries should be based on results and linked to private sector wages.

Kazaks also suggests changing the country's immigration policy, taking the pressure off salaries and increasing access to labor. Also of key importance are tax reforms and changes to the education system, notes the economist.