The Bank of Latvia has reduced its gross domestic product (GDP) growth forecast for this year from the previously estimated 5.3% to 4.6%, the Bank of Latvia said.
At the same time, the Bank of Latvia has reduced Latvia’s economic growth forecast for 2022 from 5.1% to 4.2% in September, while Latvia’s GDP growth in 2023 is estimated at 4%, compared to 3.8% previously forecast. In its turn, Latvia’s GDP growth in 2024 is forecasted by 3.3%.
The Bank of Latvia points out that Latvia’s GDP growth forecasts for 2021 and 2022 have been reduced, reflecting the impact of the pandemic on the economy.
“Short-term economic growth is being adversely affected by new outbreaks of Covid-19, particularly in Europe, new strains of the virus and increased measures to limit the spread of the virus. Economic growth is also hampered by a lack of materials, equipment and labor, as well as rising costs, especially energy prices, ”said representatives of the Bank of Latvia.
The Bank of Latvia also mentions that leading central banks, including the European Central Bank (ECB), continue to support monetary policy. Although inflation has risen to unprecedented levels, it is largely driven by rising energy prices and other transitory factors. Therefore, a sharp reduction in monetary policy support in the face of pandemic uncertainty is not desirable for the economy. In these circumstances, targeted fiscal policy support measures are needed.
According to the Bank of Latvia, Latvia’s economic growth slowed down at the end of the year due to the deterioration of the epidemiological situation, which was also forecast by the bank’s experts in the September forecast, but was further implemented by the House and strict restrictions. In the third quarter of 2021, private consumption recovered, however, spending on foreign travel without contributing to the Latvian economy is increasing. The increase in the price of construction materials and equipment exceeds the estimated costs of investment plans and slows down activity. Exports are still constrained by service restrictions.
“Even at the beginning of next year, the economy will be in the shadow of a pandemic. In addition, the requirement for a Covid-19 certificate for full-time workers in the conditions of a tight labor market, as well as the deterioration of the epidemiological situation and restrictions in Europe will have to be taken into account, ”emphasizes the Bank of Latvia’s experts.
At the same time, according to the Bank of Latvia, the factors hindering growth will subside next year.
“Global factors such as rising energy prices and supply disruptions are expected to ease significantly in the second half of next year,” the Bank of Latvia said, adding that companies in Latvia feel less painful about raw materials than in other European countries.-
Experts from the Bank of Latvia also point out that investments will play an important role in growth, which will be facilitated by the substantial financing of NextGenEU and the construction of Rail Baltica. Even though rising construction material prices may discourage investment and corporate lending remains weak, a shortage of skilled labor is driving automation.
“As uncertainty diminishes, the funds accumulated during the constraints will be spent, boosting private consumption growth. The development of exports will be determined by the recovery of external demand, assuming that cost competitiveness does not decrease Latvia’s export market shares in the world, ”notes the Bank of Latvia.
The central bank also points out that the rise in unemployment can be curbed by adapting to work remotely and by state support for a limited period. However, the requirement for Covid-19 certificates for full-time workers without everyone being vaccinated will add to the ranks of the unemployed.
“As the availability of labor declines, the pressure on wages is increasing. The wage growth forecast for 2023 has been increased and reflects the labor shortage and the public administration wage reform plan, ”said the Bank of Latvia’s experts, adding that the pandemic marked significant differences in income dynamics among lower and higher paid employees, raising income inequality and social support issues.
According to the Bank of Latvia’s forecast, the nominal gross salary in Latvia will grow by 8.9% in 2021, by 7.5% in 2022, by 6.1% in 2023, and by 5.9% in 2024.
The Bank of Latvia’s experts also mention that the general government budget deficit is growing as economic growth slows, while the government increases spending to mitigate the effects of Covid-19. These expenditures in 2021 will be more than 2.5 times higher than in 2020.
The Bank of Latvia expects that in 2021 the budget deficit will be 8.2% of GDP, in 2022 – 4.1% of GDP, in 2023 – 1.3% of GDP, and in 2024 – 0.4% of GDP. GDP. “The Bank of Latvia’s budget deficit reduction forecast includes only the current government decisions,” the Bank of Latvia emphasizes.
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