Despite the recurrence of Covid-19 outbreaks and restrictions to reduce morbidity, gross domestic product (GDP) in the fourth quarter of 2021 was 3.4% higher than in the corresponding quarter of the previous year, according to the Central Statistical Bureau’s flash estimate of GDP. Compared to the previous quarter, the economy has shrunk by 0.1% according to seasonally and calendar adjusted data. With the annual growth shown in the fourth quarter, the Latvian economy as a whole grew by 4.7% in 2021, quite significantly exceeding the forecast at the beginning of the year.
Last year’s data show that with each successive wave of Covid-19, the economy has already adapted much better to the epidemiological crisis and the adverse effects on businesses have been less and less affected. The services sector, which is most affected by the operating constraints, was able to achieve relatively strong growth of 6.7% in the fourth quarter compared to the fourth quarter of 2020. Although detailed data on individual sectors are not yet provided in the flash estimate of GDP, operational monthly data show a rapid increase in passenger air transport, and the situation in rail freight transit has also improved slightly at the end of the year. In the retail sector, with the decline in retail sales in October and November, wholesale volumes grew rapidly, and in the other services sectors, the situation and restrictions in Covid-19 also had a much smaller impact on business operations than at the end of 2020.
At the same time, manufacturing industries grew by a relatively modest 1.4% in the fourth quarter. In the manufacturing sector, after very strong growth in the first half of the year, growth has slowed in recent months, with volumes in the wood industry, which has been growing very fast so far, remaining strong in the chemical, finished metal and vehicle industries. Production volumes in construction will also not significantly exceed the level of 2020, while in agriculture the volumes were affected by the lowest cereal yield.
Overall, 2021 has shown a strong economic recovery from the Covid-19 crisis, driven by both the ability of companies to better adapt to adverse conditions and the extensive support provided by the state to both constrained businesses and those who have lost income directly and to disadvantaged groups. At the same time, in the second half of the year, the problem of rising energy prices has become quite clear, affecting both households and sharply increasing the production costs of companies. This will also be a major economic challenge for 2022, with Covid-19 becoming less and less affected by economic processes.
The Ministry of Finance is currently developing updated macroeconomic forecasts for the Latvian Stability Program 2022-2025. to be published in mid-February. The information available so far suggests that the spread of the disease could have a much smaller impact on economic growth this year. If the initial positive indications for a much less severe disease caused by the Covid-19 Omicron variant are confirmed, the speed and efficiency with which the economy will be relieved of all restrictions to reduce the spread of the disease, including in the labor market and services sectors, will be crucial. At the same time, rising energy prices will continue to weigh on economic developments, creating risks of a sharp rise in overall prices, which could reduce both the competitiveness of companies and the financial situation and consumption of the population.
The slightly slower-than-expected global economic growth has already been marked by the latest IMF forecasts, reducing the 2022 growth forecast from 4.9% in October to 4.4%. Slower growth is expected worldwide, but the most significant cuts are in the world’s largest economies, the United States and China, by 1.2 and 0.8 percentage points, respectively, while the eurozone’s growth forecast for 2022 has been lowered by 0.4 percentage points.
Although the risks have increased, sentiment in Europe remains positive and the European Commission’s Economic Sentiment Index (ESI) for the EU as a whole is far from its historic high last summer, with some deviations over the past two months. In Latvia, the mood of entrepreneurs and consumers is more pessimistic and has been gradually deteriorating since June last year. Over the past three months, it has already fallen below its long-term average, affected by both the relatively unfavorable situation for the containment of Covid-19, rising prices and growing geopolitical tensions in the region.
MINISTRY OF FINANCE
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