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UPDATE 1-Latvia Q1 GDP up for first time q/q in 2 years

By Aija Braslina RIGA, May 10 (Reuters) - Latvia's economy, the worst hit by financial crisis in the EU last year, crawled out of recession in the first quarter with its first seasonally adjusted quarterly growth for two years, data showed on Monday. The statistics office said in a statement that in the first quarter gross domestic product (GDP) inched up 0.3 percent on a seasonally adjusted basis, the first quarterly growth since a 0.1 percent rise in the fourth quarter of 2007. The economy still dropped 6.0 percent year-on-year, but this was much less than the 16.9 percent of the previous three months and the median forecast in a Reuters survey of -7.1 percent. The government, facing an election in October, hailed the data as showing it had chosen the right policies in the crisis, which began in 2008 and forced Latvia to make harsh budget cuts to win funding from a 7.5 billion euro EU and IMF-led bailout. Analysts said the data showed a positive trend, but were cautious about the future outlook. "It will not get worse anymore," said Swedbank economist Dainis Stikuts, adding future quarterly GDP drops were possible. "News and data still shows that the situation differs in different sectors, which means that the recovery still is and will be unequal," said SEB economist Dainis Gaspuitis. "Thus some caution about the future outlook should be preserved. Events in Greece will play a big role and new turbulence cannot be excluded," Gaspuitis said in a note. Analysts said they still forecast a GDP drop of 2.5 to 3 percent this year. GOVERNMENT PLEASED But Prime Minister Valdis Dombrovskis, who leads a minority centre-right coalition, hailed the small first quarter growth. "These data confirm that future quarters will show better results, which allows for more optimism on gross domestic product (GDP) this year and next," he said in a statement. Dombrovskis's government approved wide cuts to the budget and tax rises to stop the deficit soaring. Under the bailout, led by the International Monetary Fund and European Union, he promised to reduce the budget deficit to 3 percent of GDP by 2012 with a hope to adopt the euro in 2014. "Of course, these data do not show Latvia's economy has completly overcome the crisis. They only show it is moving in the right direction," added the Finance Ministry in a statement. The Baltic region has suffered the worst economic falls in the European Union during the global crisis, led by Latvia's 18 percent output drop in 2009. Swedish banks like Swedbank and SEB, which invested heavily in the region, also suffered big losses. They have said the pace of rise of bad loans is now easing off. The statistics office said in a statement that versus the fourth quarter, GDP dropped 19.2 percent on a non-seasonally adjusted basis, but seasonally adjusted it rose 0.3 percent. The statistics office said the year-on-year drop was caused by a fall in all sectors, except industry, which rose by 9.6 percent in the first quarter. (Reporting by Aija Braslina; Editing by Stephen Nisbet) Keywords: LATVIA ECONOMY/ (Riga newsroom, aija.braslina@reuters.com, +371 26 596 553) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved.

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