Latvian central bank revises its economic forecasts downwards

The Latvian central bank (Latvijas Banka, LB) has revised its GDP and inflation forecasts for 2021 downwards, citing increased uncertainty about the future.

The 2020 GDP forecast remains unchanged at -4.7% but the projected economic recovery in 2021 will likely be much weaker than projected in September's forecast. Now the central bank expects growth of just 2.8% in 2021 compared to a figure of 5.1% in its last forecast.

Meanwhile, the inflation forecast was revised slightly downwards to 0.1% for 2020 and to 1.1% for 2021 as compared to the September projections of 0.2% and 1.4% respectively.

The central bank also underlined the difficulty of providing any reliable forecasts in such an extraordinary situation as the present.  

"In view of the heightened uncertainty surrounding the forecasts, they may be subsequently adjusted significantly, based on the measures to contain the spread of COVID-19 and the ability of the government to implement adequate measures to support individuals and businesses affected by the second wave of COVID-19. Furthermore, they may be adjusted, depending on the efficiency of use of the European recovery funding and the very favourable financing conditions ensured by the accommodative monetary policy," LB said.

"According to the assessment of Latvijas Banka's economists, the outlook for global and euro area economic growth is still subject to the evolution of the COVID-19 pandemic. The current COVID-19 statistics are concerning. Nevertheless, the positive vaccine trial results and the take-up of vaccines, which has already started in some countries, give reason for more optimism. Meanwhile, uncertainty remains high as the Brexit trade deal between the EU and the UK is still under negotiation and the trade tensions with the US continue despite the outcome of the US presidential election," the central bank warned

The gradual economic recovery in 2021 and 2022 is based on the assumption that medical solutions will become available at the beginning of the next year, thus allowing for gradual relaxation of restrictions both in Latvia and worldwide.

Consequently LB's forecast of GDP growth of 5.3% in 2022 is considerably more optimistic.

The forecasts were finalized on 25 November 2020, and the cut-off date for technical assumptions is 18 November.

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

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