Latvian central bank expects "temporary and shallow recession"

Latvijas Banka (LB), the Latvian central bank, on December 16 published its latest macroeconomic forecasts, with a "temporary and shallow recession" expected in the economy.

"These forecasts are surrounded by a persistently high degree of uncertainty resulting from the unpredictable war started by Russia and the related developments in global prices, particularly those of energy," the central bank said by way of preamble.

"Latvia's gross domestic product (GDP) growth projections for 2022 have been revised downwards to 2.1% (3.0% in September). Nevertheless, the overall economic outlook has remained broadly unchanged, and the development in 2023 is seen similar to the previous forecasts, projecting a 0.3% contraction (a 0.2% fall in
September)," LB said.

However, what it called a "minor drop in GDP growth" will be accompanied by a more pronounced 5.6% contraction in household consumption. "Lower purchasing power will have a negative effect on the population's welfare," LB warned.

Economic growth is expected to recover in 2024, reaching the previously projected 4.4%, and to increase by 3.5% in 2025 – though of course these figures are also subject to numerous factors including developments in the war. 

Latvian central bank inflation projection, Dec 2022
Latvian central bank inflation projection, Dec 2022

Meanwhile, inflation will be even more of a problem than previously anticipated.

"Inflation remains high, and the assumptions concerning the growth of the global food prices and domestic wages used in Latvijas Banka's forecasts have been revised upwards. That resulted in upward revisions of inflation projections over the entire projection horizon: inflation is expected to grow by 17.3% in 2022 (16.9% in September), by 10.9% in 2023 (9.2% in September) and by 4.4% in 2024 (3.4% in September). In 2025, inflation is projected at the level of 3.0%." LB said.

"With energy prices normalising, inflation in Latvia is expected to subside. The rise of the global food prices and wages, however, could be more pronounced and sustain a higher inflation than previously estimated," LB warned.

Faltering consumption will be supported by additional government support measures in an energy crisis and a substantial rise of the minimum wage in the years to come, but consumers will remain cautious against a backdrop of high inflation, the central bank outlined.

"Although the end of the year and the beginning of next year in Latvia's economy will be marked by a recession, this recession is expected to be temporary and shallow... a tight labor market along with the rising minimum wage and wage increases in certain areas of the public sector will sustain the average wage growth in the coming years, and the purchasing power will rebound in the second half of 2023," it predicted.

Offering some policy advice to the new government, the central bank said "The government support should reach the most vulnerable households, it should not fuel inflation and at the same time it should stimulate energy savings. When the support ends, the government deficit will decline. However, with wages in certain sectors and spending on defense and domestic security being increased and spending more to attain the climate objectives, the improvement of the budget balance could be slower than previously projected."

Changes in the financing conditions faced by the government should also be taken into account, as higher borrowing rates mean larger debt service costs, it added.

Seen a mistake?

Select text and press Ctrl+Enter to send a suggested correction to the editor

Select text and press Report a mistake to send a suggested correction to the editor

Related articles


Most important