The forecasts of the International Monetary Fund for Latvia are surprisingly good

The International Financial Organization predicts that this year the planet’s overall economic growth could reach 3%, compared to 3.5% last year. At the same time, it should be added that the organization’s 3% forecast, if fulfilled, will be reached at a time that has brought with it a significant decline in world trade. Global economic growth is expected to slow to 2.9% next year. It should be noted that recently the economic performances and their forecasts are quite modest against the historical background. For comparison, in the period from 2000 to 2019, the world’s annual economic growth reached an average of 3.8%. In addition, this period also includes a time when the world economy experienced the second biggest crisis in its history, so the growth was even faster in the good years. To some extent, this may serve as a signal that the situation could be even worse than it is now. Or one can conclude that the slowdown in global economic growth will be reflected in the gross domestic product numbers with a slight lag, with the current negatives affecting next year’s global economic statistics. On the one hand, this may indicate that the economic life in Latvia may not be easier next year either, but at the same time there is also good news, and their impact on our country may be much more pronounced than the overall average growth indicators of the planet

Will Europe recover?

The news, which is at least conditionally favorable for Latvia, is related to Europe’s economic recovery. The fact that, in the long term, Latvia’s economic growth is ensured by the export of goods and services, while local consumption is subordinated to the flow of export and investment money flowing into the country, is already a generally known fact. It should be said right away that no significant economic growth in Europe is expected, but there is good news, that is, from the forecasts of the Monetary Fund, it follows that the situation will not worsen, rather it will become “a penny” better. Our foreign trade partners are located mainly in Europe, so our growth is directly related to the economic health of this region. It is true that during the last decade the share of the USA in the export structure of our goods has grown very rapidly, but basically we live off the prosperity of Europe. In this case, it is important that, according to the IMF, Germany’s economic growth could reach 0.9% next year, as opposed to this year’s expected drop of half a percent.

The current high interest rates could have a more pronounced effect on Germany next year, because in Western Europe, in connection with the greater use of fixed loan interest rates, the current increase in interest rates by the European Central Bank (ECB) has not affected borrowers as sharply as in the Baltics. Therefore, there would be reason to believe that the biggest troubles in the Western European economy in connection with the current monetary policy are yet to begin. However, there is a counter-argument among economists that inflation shows a clear decreasing trend, but in connection with inflation there has been quite a significant rise in wages, and therefore people’s purchasing power is currently increasing. This increase in purchasing power can then be a new driving force for the European economy, which could inject additional money into the wallets of Latvian exporters.

Among the large European countries, the acceleration of economic growth is also expected in France and Great Britain. The GDP growth of the first of the two is expected to be 1% this year, and 1.3% next year. On the other hand, for the second, these numbers are 0.5% and 0.6%, respectively. Although it is about acceleration, in real terms the growth is very little noticeable, and in fact it can rather be said that it is about economic vegetation, which does not lead to fundamental development in the long run.

Forecasts for Latvia pleasantly surprise

With regard to Latvia, the IMF’s forecasts may seem surprisingly good, but at the same time, it should be taken into account that the organization’s predictions may not be fully fulfilled. Although the national economy of our country is constantly slipping into recession, according to the IMF, it could grow by half a percent this year in contrast to the other two Baltic neighboring countries. At the beginning of the year, our economic growth was still worth zero, in the second quarter compared to this period last year there was a drop of 1.1%, but the quick assessment of the Central Statistics Office for the third quarter shows that in annual terms the drop was a tenth of a percent. This relatively small decline was largely at the expense of higher tax collection, as the nominal economy and consumption in monetary terms had increased along with high inflation. There is little hope that in this – the last – quarter of the year, Latvia’s economic improvements will be so impressive that our country will be able to close the entire year with economic growth. Meanwhile, Lithuania’s GDP is forecast to fall by 0.2% this year, while Estonia’s economy could shrink by 2.3%. In the next year, the economic growth of all three Baltic countries is estimated at 2.4-2.7%. Specifically – GDP in Latvia could grow by 2.6%. This is roughly in line with the forecasts of the state budget makers. If the European economy starts to recover, the fulfillment of such forecasts could seem realistic, but the necessary precondition for this would be a return of the monetary policy of the central bank in the direction of decreasing interest rates on loans. Currently, in the financial market sidelines, there are occasional hypotheses that the ECB could start cutting interest rates faster. If this were to happen, our country’s export capacity could again see a boom. Otherwise, one should rather expect that there will be no growth or that it will be written with a minus sign.