Latvian central bank revises its economic forecasts

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The Latvian central bank, Latvijas Banka (LB), has published its June 2021 macroeconomic forecasts, including the latest GDP and inflation predictions for the country. 

Latvia's GDP growth forecast for 2021 remains unchanged, with GDP projected to increase by 3.3% and 6.5% in 2021 and 2022 respectively. 

Meanwhile, Latvia's inflation forecast has been revised upwards to 2.0% in 2021 and to 2.9% in 2022, as compared to the March inflation forecast of 1.8% in 2021 and 2.2% in 2022. Inflation will reach more than 3.5% at the beginning of 2022 before falling back again, the central bank believes.

"With the number of vaccinated people growing and the Covid-19 infection rate declining both globally and in Latvia, the restrictions to contain the pandemic are being gradually eased. This, along with accommodative monetary policies implemented by major central banks and government support still provided to businesses and households, will ensure the global economic recovery," LB said.

"Meanwhile, inflation dynamics is affected by a rise in global demand causing a surge in commodity prices. On account of an increase in the global oil and food prices, Latvijas Banka has revised its inflation forecast upwards. While the underlying inflation will continue to increase, the factors associated with the rise in global commodity prices will stabilise, and in 2023 inflation is projected to stand at 2.0%, as compared to 1.8% projected in the March forecasts," the central bank added.

"The sentiment of economic agents and the employment expectations of businesses have improved rapidly since April. Retail trade and manufacturing sectors, too, are already posting good performance," it noted.

Further easing of restrictions will be reflected in economic growth as services will become more available and households will be able to spend their savings accumulated during the pandemic, it said.

However, LB said Latvia's budget deficit was likely to be larger than previously predicted.

"In view of the fact that the pandemic is retreating only gradually, the government support was extended for this year, and the social expenditure will increase in the following years, inter alia due to changes in the child-care benefit. Therefore, the general government budget deficit forecast for 2021 has been revised upwards to 9.9% of GDP. The budget deficit forecast for 2022 and 2023 stands at 2.1% and 0.8% of GDP respectively. The forecast is based on the no-policy-change assumption, only taking account of the currently adopted government decisions," the central bank explained.

Its estimate of a decline in the unemployment rate from 8.3% in 2021 to 7.0% in 2023 remained unchanged. However, the shortage of labour already experienced before the crisis re-emerged in spring and will lead to a rise in the average wage by 6.9% in 2021 and by almost 5.5% in the coming years, in LB's view.

LB economic forecasts, June 2021
LB economic forecasts, June 2021

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