Latvian central bank predicts major economic contraction ahead

Latvia's central bank, (Latvijas banka, LB) updated its economic forecasts March 26 and unsurprisingly, given the severity of the world coronavirus crisis, the prognosis is not optimistic.

"The Bank of Latvia has revised Latvia's gross domestic product (GDP) and inflation forecasts. Taking into account the current developments in the world economy, LB predicts that Latvia's GDP will decline by 6.5% in 2020 (compared to a 2.6% increase predicted in December 2019), while inflation will be 0.5% (December 2019 prediction was 2.4%)," the central bank said.

These projections include a high degree of uncertainty as it is not clear what path te COVID-19 crisis will take from day to day, let alone in the longer term. The predictions "may be subject to significant revisions if the world fails to contain Covid-19 and economic growth does not resume in the second half of the year," LB said. 

The IMF is forecasting negative global growth this year, with a decline expected at least at the level of the global financial crisis. In addition, recent market participants' projections for growth in the euro area range from -5% to -1.7%. 

"Such unfavorable and comprehensive global shocks pose problems for companies in the short term to provide cash flow to meet their current liabilities, jeopardizing their solvency. Targeted support measures by the Latvian government are a crucial step in mitigating the effects of the crisis so that short-term disruptions in the economy do not result in a significant loss of economic capacity that would delay recovery once the coronavirus is halted, thereby creating a lasting negative impact on economic activity," the central bank said. 

The government measures currently announced are a step in the right direction, but they must be commensurate with the magnitude of the crisis, targeted at businesses and citizens hardest hit by the crisis, covering a wide range of economic sectors, and limited in time, LB advised. 

However, at least Latvia, compared to many other countries, has been fiscally responsible, ensuring a relatively low level of public debt, which now allows providing the necessary support to the economy in times of crisis, it added.

More detailed information about the latest forecasts is available in macroeconomic forecasts section of Latvijas Banka's website

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