Latvian central bank becomes more upbeat on growth

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Latvijas banka, the Latvian central bank (LB) revealed its latest macroeconomic predictions March 30.

Central bank governor Mārtiņš Kazāks revealed a slight improvement in sentiment overall. In 2021, Latvia's gross domestic product (GDP) is expected to grow by 3.3%, and in 2022 at almost twice that rate at 6.5%.

Previous forecasts made in December predicted 2.8% growth this year, and 5.3% in 2022.

Due to the spread of Covid-19, Latvia's GDP decreased by 3.6% last year compared to 2019. Last year, GDP at current prices was worth 29.3 billion euros.

"The overall GDP growth forecast for 2021 has been increased to 3.3%. Assuming that vaccination will proceed as planned, restrictions are expected to be reduced considerably from the second half of 2021, improving consumer and business sentiment," said the central bank.

"The fiscal measures supporting household income and more active spending of the precautionary savings and savings accumulated due the postponed consumption will be the factors behind the rapid recovery of the private consumption. On the one hand, high labour supply and limited financial resources of businesses prevent more rapid wage growth. Nevertheless, raising the minimum wage, increasing the wages of medical and teaching staff, short-term Covid-19 related bonuses for medical staff and one-off support payments supplementing the financial well-being of selected population groups also stimulate consumption. The rapid public consumption growth seen this year is related to the increased fiscal support for softening the crisis impact," LB added.

"Investment decisions will be supported by the improving economic sentiment, as well as the financing of the Recovery and Resilience Facility (RRF) of the European Union (EU) will become available gradually. Export growth is estimated to move closely to the development of external demand, with Latvia's trade partners having addressed the crisis with smaller losses than the EU average last year and their economies rebounding from a better start position this year. Exports of goods registered growth already in the second half of 2020, and sentiment improvement will also gradually restore the flows of services hit by the restrictions. With the external and particularly the domestic demand improving, imports of goods and services will also see accelerated growth, and the foreign trade and current account balances will become negative," it predicted.

Predicted inflation is also now expected to be stronger than previously with December's forecast of 1.1% inflation for 2021 increased to 1.8% in the new forecast, with annual inflation to tick up again in 2022 to 2.2%. 

"February is likely to have been the last of the most recent months with consumer price deflation. Latvijas Banka's inflation forecast for 2021 has been revised upwards to 1.8%. This was mainly supported by the rising global commodity prices and service prices on account of pent-up consumption and higher per customer costs caused by the social distancing measures, as well as by the significant increase in the minimum wage implemented at the beginning of this year. Although neither the producer and import price developments nor the inflation expectations of businesses and consumers allow to project a steep rise in inflation, annual inflation could temporarily approach the presently rarely seen level of 3% in some episodes of 2021," LB said.

However, all predictions come with the caveat that much will depend upon the course of the Covid-19 pandemic and the effectiveness of current vaccines against any new strains of the virus than may emerge.


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