Commission cuts Latvia's GDP forecast due to banking and freight trouble

The Latvian economy is expected to grow by 3.3% this year, which is a revised forecast down from 3.5%, the European Commission says in its Spring 2018 Economic Forecast.

Valdis Dombrovskis, the European Commission’s Vice President for the Euro and Social Dialogue, told LETA that investment will continue to grow as EU funding flows into the economy and strong wage growth and moderate employment growth will ensure a steady rise of household consumption.

“Yet compared with the previous forecast, Latvia’s economic growth forecast has been slightly downgraded. This is related to problems in the banking sector and a slowdown in rail freight transportation through Latvia.

This and next year Latvia’s budget deficit will slightly exceed 1% of GDP. By comparison, a balanced budget or a small surplus is being projected in Estonia and Lithuania,” Dombrovskis said.

The European Commission indicates in its Spring 2018 Economic Forecast that growth rates for the EU and the euro area beat expectations in 2017 to reach a 10-year high at 2.4%. Growth is set to remain strong in 2018 and ease only slightly in 2019, with growth of 2.3% and 2.0% respectively in both the EU and the euro area.

In 2017, real GDP growth reached 2.4% in the EU and in the euro area as the economy moved into higher gear. Growth was supported by high consumer and business confidence, stronger global growth, low financing costs, healthier private sector balance sheets and brighter labor market conditions. While short-term indicators suggest a cooling of activity in early 2018, this looks likely to be partly temporary.

The pace of growth is expected to remain robust on the back of sustained consumption and strong exports and investment. Both the EU and the euro area are forecast to grow by 2.3% this year. Growth in both areas is projected to ease to 2.0% in 2019 as bottlenecks become more apparent in some countries and sectors, monetary policy is adjusted to circumstances and global trade growth calms somewhat.

Private consumption remains strong, while exports and investment have increased. Unemployment continues to fall and is now around pre-crisis levels. In the EU, unemployment is set to continue to decline, from 7.6 percent in 2017 to 7.1 percent in 2018 and 6.7 percent in 2019. Unemployment in the euro area is forecast to fall from 9.1 percent in 2017 to 8.4 percent in 2018 and 7.9 percent in 2019. The number of people in work in the euro area is now at its highest since the introduction of the euro, but some labor-market slack remains in the euro area. While in certain Member States unemployment is still high, in others, job vacancies are already getting harder to fill.

However, the economy is more exposed to external risk factors, which have strengthened and become more negative. Robust growth is facilitating a further reduction in government deficit and debt levels and an improvement in labor market conditions. The aggregate deficit for the euro area is now less than 1 percent of GDP and is forecast to fall under 3 percent in all euro area Member States this year.

Consumer price inflation weakened in the first quarter of this year but is expected to pick up slightly in the coming quarters, partly due to oil prices that have recently increased. Underlying price pressures are also building as a result of tighter labor markets and faster wage growth in many Member States. Overall, inflation in the euro area is forecast to remain the same in 2018 as in 2017 at 1.5 percent and then rise to 1.6 percent in 2019. In the EU, the same pattern is expected, but with inflation forecast to continue at 1.7 percent this year before rising to 1.8 percent in 2019.

The aggregate euro area government budget deficit and public debt both fell as percentages of GDP in 2017, helped by strong economic growth and low interest rates. With Member States' budgets benefitting from the effects of improving labor market conditions, including through lower social benefit payments, 2018 is set to be the first year since the start of the Economic and Monetary Union in which all governments manage budget deficits of less than 3 percent of GDP, as referred to in the Treaty.

The aggregate general government deficit of the euro area is now forecast to fall to 0.7 percent of GDP in 2018 and 0.6 percent in 2019. In the EU, the aggregate deficit is forecast to be at 0.8 percent in 2018 and 2019. The euro area's debt-to-GDP ratio is forecast to fall to 84.1 percent in 2019, with declines projected for almost all member states.

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said: “Europe continues to enjoy robust growth, which has helped drive unemployment to a ten-year low. Investment is rising and public finances are improving, with the deficit in the euro area set to drop to just 0.7 percent of GDP this year. The biggest risk to this rosy outlook is protectionism, which must not become the new normal: that would only hurt those of our citizens we most need to protect.”

Dombrovskis projected that “the economic expansion in Europe is set to continue at a solid pace this year and next, supporting further job creation. However, we also see increased risks on the horizon. This is why we should use the current good times to make our economies more resilient. This means building fiscal buffers, reforming our economies to foster productivity and investment, and making our growth model more inclusive. It also means strengthening the foundations of our Economic and Monetary Union."

Overall, the risks to the forecast have risen and are now tilted to the downside. In Europe, recent indicators have reduced the likelihood that growth in Europe might turn out stronger than expected in the near term. Externally, the financial market volatility experienced in recent months is likely to become a more permanent feature in the future, which will add to uncertainty.

Pro-cyclical fiscal stimulus in the US is expected to boost short-term growth, but to raise the risk of overheating and the possibility that US interest rates rise faster than currently assumed. Also, an escalation of trade protectionism presents an unambiguously negative risk to the global economic outlook. These risks are interrelated. Due to its openness, the euro area would be particularly vulnerable to their materialization.

To allow for a comparison over time, the projections for the EU for 2019 contained in the forecast consist of projections for all 28 Member States, including the United Kingdom.

Given the ongoing negotiations on the terms of the United Kingdom's withdrawal from the EU, the Commission's projections for the time after Brexit are based on a purely technical assumption of status quo in terms of trading relations between the EU27 and the UK. This is for forecasting purposes only and has no bearing on the talks underway in the context of the Article 50 process.

     

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