Latvia’s economy is currently neither growing nor falling, and the past year has ended with a slight recession in the economy. According to the information published by the Central Statistics Office, in the 4th quarter of 2023, Latvia’s GDP increased by 0.1% compared to the last quarter of 2022, while last year, the economy of Latvia as a whole, excluding inflation, decreased by 0.3%.
The decline of the economy last year is, of course, not pleasant, but it cannot be called significant, and in general, the year 2023 in the Latvian economy has been better than predicted at the beginning of the year. Also, several of the biggest risks in the economy have been resolved – inflation is currently below 2%, interest rates are no longer rising and energy prices in Europe have returned to pre-crisis levels. Therefore, the outlook for this year in Latvia’s economy is cautiously optimistic, and according to my forecasts, Latvia’s GDP could grow by 2%.
Latvia’s economy has not grown since the beginning of 2022
Despite the slight downturn in the economy, the performance of sectors last year was very different. In 2023, the Latvian economy had the hardest time in the production and transport sectors, mainly due to weak external demand and the cyclical decline of world industry. As a result, manufacturing output fell by 1.9% in the 4th quarter of 2023 compared to the end of 2023, while output in the transportation sector fell by 10%.
Similarly, last year agriculture was also affected by unfavorable weather conditions and falling prices, the output of which decreased by 8.8% in the 4th quarter, while in retail trade the biggest challenge was the decline in the purchasing power of citizens caused by high inflation and the increase in interest rates, accordingly, trade output in the last quarter of last year decreased by 3.9%. Meanwhile, service sectors were mostly positive last year and offset declines in goods sectors.
Growth is expected in the economy this year, but there are many risks
Although growth in the eurozone is also currently weak, the leading indicators suggest that the situation in the eurozone economy has begun to stabilize, and the European Commission’s business surveys show that the level of inventories in industry has begun to decrease. The high level of stock of goods in industry and weak demand in trade last year was the main reason why a relatively large decline was observed in industry and the transport sector, not only in Latvia, but in the world as a whole. Therefore, destocking is a good signal that allows us to hope for positive growth in the industry and the transport sector this year.
At the same time, wages continue to grow rapidly in Latvia, which, together with low inflation, will ensure a noticeable increase in purchasing power this year, and this is good news for retail trade. Finally, we also expect a positive contribution to growth from the agricultural sector, where last year was relatively weak both in terms of prices and harvest.
At the same time, despite positive growth forecasts, there is still a lot of uncertainty in the economy and there are other risks besides inflation. The geopolitical situation currently seems to be the most significant threat to Latvia’s economy, which, due to concerns about possible Russian aggression, may begin to negatively affect investments. On the other hand, internally in Latvia, the decrease in the number of the working-age population, together with the very rapid increase in wages and weak productivity growth, creates increasing risks for competitiveness, as well as the potential for further price increases.
Concerns about more persistent inflation are not only in Latvia, but also in the eurozone. Consequently, since the beginning of the year, financial markets have become significantly more cautious, the first interest rate cut is now not expected earlier than June, and by the end of the year the Euribor could only drop to 3% instead of the previously expected 2.5%.
2024-03-02 11:35:58
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