At the beginning of the preparation of the government budget for 2021, the FM has developed forecasts for macroeconomic indicators for 2020-2023, taking into account the economic impact of the crisis caused by COVID-19. The FM forecasts that gross domestic product (GDP) at comparable prices will fall by 7.0% this year, while economic growth will recover in 2021, with GDP growth rising by 5.1%.
The economic downturn in 2020 will be determined by both a 7.5% decline in private consumption, a decrease in exports of 10.3% and a drop in investment of 10.2%. On the other hand, public consumption will increase by 3.1% when the state finances economic support measures. The economic development forecast for 2020 is based on the assumption that the spread of the virus is limited by the middle of the year and then economic activity is gradually recovering. The largest decline in the economy is forecast in the second quarter of this year, but then activity will start to increase in the sectors affected by the crisis.
Economic growth will reach 5.1% in 2021, with GDP not yet returning to 2019 figures, and growth will stabilize at 3.1% in 2022 and 2023.
Annual average inflation is projected at 0.2% in 2020 and 1.2% in 2021. Compared to the forecasts of the Latvian Stability Program 2020-2023, the inflation forecast for 2020 has been reduced by 0.2 percentage points and by 0.5 percentage points for 2021, mainly due to the sharp fall in energy prices, as well as the decrease in service prices. Consumer price growth will stabilize at 2% levels over the next two years.
With the employment support measures approved by the government, the economic population forecast for 2020 is slightly increased, with the number of workers expected to fall by 4.4% to 870 thousand this year, instead of the 5% drop previously forecast. The unemployment rate will be 10.5% in 2020, respectively, and compared to previous forecasts, the unemployment rate forecast is reduced by 0.7 percentage points. In 2021, with the recovery of economic growth, the number of employees will increase by 0.6%, while the unemployment rate will fall to 9.8%.
A slightly lower 2020 is also expected to result in a monthly average wage reduction of 1.0% to €1065, compared with €1044 previously forecast.
Wage growth will gradually recover in the coming years, with average monthly wages increasing by 3.0% in 2021 and then stabilizing at levels close to overall economic productivity growth.