Finance Ministry slashes Latvia's growth forecast

The Ministry of Finance (FM) has updated its macroeconomic forecasts until 2028, slashing the growth prediction for this year in the process. 

According to updated forecasts, Latvia's gross domestic product (GDP) will increase by 1.4% in 2024, while economic growth is expected to accelerate to 2.9% in 2025.

Compared to the previous forecasts developed at the beginning of June 2023, the GDP growth forecast for 2024 has been reduced by 1.1 percentage points, while the forecast for 2025 remains unchanged. In general, economic growth will slow slightly over the next three years, reaching 2.5% in 2026 and slowing to 2.3% by 2028, according to the revised figures.

"We see that there is still a high level of uncertainty throughout Europe, both in connection with the war started by Russia in Ukraine, as well as the European Central Bank's policy and forecasts regarding the possible start of lowering interest rates this year, which hinders investment decisions. We must expect that the rate of economic growth will not be as good as we would like, and we will have fewer resources available to us as a country. Therefore, the implementation of large investment projects and the increase in European Union fund funding will play a more significant role this year and in the coming years," commented Finance Minister Arvils Ašeradens.

According to preliminary data, Latvia's economy failed to meet expectations last year and shrank by 0.6%, affected by a drop in exports and private consumption.

"During the last months, the economic growth forecasts of Latvia's main foreign trade partner countries for 2024 have gradually worsened. Although these forecast reductions were still very moderate, lower growth in Europe will also reduce the expected growth of Latvia's economy. In general, higher growth rates for the European Union (EU) and the eurozone are predicted for this year than in 2023, but they are still at a historically low level," explained the Ministry.

The Latvian inflation forecast for 2024 has been reduced to 1.6% from the previous forecast of 2.2% for this year. In the medium term, until 2028, inflation is expected to stabilize around 2.5%.

According to Finance Ministry forecasts, the unemployment rate this year should remain at the 2023 level of 6.4%, but then gradually decline to 5% by 2028 under the influence of faster economic growth and the demographic situation. The number of people employed in the economy will remain stable at the level of 888 thousand with a slight downward trend.

The average monthly salary will continue to increase this year, which will be influenced by the increase in the minimum wage from 620 to 700 euros, as well as the increase in state budget expenditures for salaries of public sector employees, including in the health, defense and education sectors. The Ministry predicts that the monthly average gross salary will increase by 7.5% this year, reaching 1,650 euros, but in the coming years the rate of wage growth will become slower and stabilize at around 5%. Monthly average gross salaries are expected to pass the 2,000 euro barrier in 2028.

In the process of preparing the forecasts, the Ministry consulted with the European Commission, the Bank of Latvia, the Ministry of Economy and commercial banks. The forecasts of macroeconomic indicators were approved by the Fiscal Discipline Council on February 12, 2024.

Full forecasts of the FM's macroeconomic indicators can be found here.

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