Latvian Central Bank president: economy is weak this year

The economy of both the eurozone and Latvia is weak this year, but it will begin to recover in the second half of next year, said Mārtiņš Kazāks, President of the Latvian central bank (Bank of Latvia, LB), in an interview with the Latvian Television morning newscast on Septemebr 29.

Kazāks stated that inflation has decreased significantly – at the beginning of the year it was at 20%, but in August it was below 6%. Projections show inflation will be below 2% at the end of the year.

“That's good news. The second good thing – since the middle of the year, wage growth has been faster than price rise, so the purchasing power of residents is gradually recovering,” Kazāks said.

Overall, however, this year is weak both in the eurozone and in Latvia. “The beginning of next year will not be particularly strong, but in the second half of the year [the economy] will grow more strongly due to wage growth, gradually the large projects that are being implemented in Latvia will drag the economy upwards. Over the course of the year, the European economy will also start growing faster, which will benefit our exporters,“ noted the President of LB.

Meanwhile, the head of the Monetary Policy Office of the Bank Uldis Rutkaste said in an interview with Latvian Radio that, in parallel with the good news about the rapid fall in inflation, one unpleasant factor has emerged – oil prices in global markets are higher than previously expected. Consequently, fuel prices have increased, so the Bank of Latvia has slightly revised the inflation forecast, but it should still be below 2% at the end of the year.

Rutkaste also said the economy should recover next year as unemployment remains low, but real incomes for residents are starting to recover after the shock of inflation.

At the same time, Kazāks acknowledged that although the labor market is strong and wages are increasing, the worry is that wage growth will be faster than productivity in the future, which may lead to competition problems, and then the economy will not grow again.

Therefore, the labor market situation needs to be improved and there are two options here: internal resources need to be used to improve the skills and health situation of the population and, in some cases, labor imports need to be considered.

“Construction projects, the way they are planned in Latvia, cannot be built with local resources,” Kazāks said.

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