Compared to the previous forecasts on which the 2018 budget was based, GDP growth forecast for 2018 has been raised by 0.6% points, and the forecast for 2019 by 0.2% points.
The economic growth is expected to accelerate because of the favorable situation in external markets and increased investment activity in Latvia as the flow of the EU funds grows, the ministry said. In 2017 Latvia’s GDP rose 4.5%, according to preliminary results, and it was the steepest rise since 2011.
The Finance Ministry expects that in 2018 and in a medium term there will be strong export growth, while investments are expected to rise 10 percent. Private consumption will also be a strong drive, promoted by a strong wage growth and further reduction of unemployment level. The gross monthly average wage in 2017 increased by 7.5%, and might grow 8% in 2018, reaching €997 a month, according to the ministry. The steep wage growth this year will be determined by the growing demand for employees, and significant increase of the minimum wage as of January 1, 2018. In 2019 the average wage is expected to grow slower – by 6%.
Consumer price level in Latvia in 2018 will remain at the previous level at 2.8%. The comparatively high inflation level in 2018 will be determined by the strong economic growth, increase of wages, and excise tax hike on oil products, tobacco products and alcoholic beverages, while in 2019 inflation is expected to drop to 2.4%.
The Finance Ministry’s macroeconomic forecasts have been developed based on a conservative scenario, assessing risks of internal and external environments. The forecast risks are upward and may ensure a steeper GDP growth than projected in the base forecast. On the other hand, there are a number of serious negative risks, including the low investment level in national economy. Reduction of the number of working age employees creates a pressure in the job market and stimulates further increase of wages that may influence Latvia’s international competitiveness. Among external negative risks, there are also geopolitical instability, political uncertainty and the high fluctuation level in the world’s financial markets.