Latvian central bank says 2023 will be year of "stagnation"

"These forecasts are surrounded by a high degree of uncertainty resulting from the unpredictable war started by Russia and the related developments in global prices, particularly those on energy," the bank said by way or a prequel to what are generally very downbeat expectations.

"The baseline scenario of Latvijas Banka's forecasts provides for a temporary recession," LB said. 

"Although the soaring energy prices have resulted in a deterioration of the future economic outlook, the solid growth observed at the beginning of the year has allowed to maintain the GDP growth projections for 2022 at 3.0%, similar to the growth rate projected in June (2.9%)."

"With the effects of unfavourable factors still persisting at the beginning of 2023, Latvia's economy can be expected to stagnate next year. Therefore, the forecast for 2023 has been revised significantly downwards to –0.2% (2.4% in the June forecasts)," LB continued.

With inflation returning to lower levels, Latvia's economy is expected to return to growth of 4.4% in 2024 (4.2% in the June forecasts).

Inflation projections have been revised upwards mostly on account of higher energy (particularly, gas) and food prices. Inflation is expected to be 16.9% in 2022 (14.8% in the June forecasts), 9.2% in 2023 (7.0% in the June forecasts) and 3.4% in 2024 (2.4% in the June forecasts).

"Latvijas Banka has revised its forecast for Latvia's GDP downwards, expecting a short-lived recession... With unemployment decreasing further, Latvia's labor market remains tight. At the same time, the purchasing power of the population and consumption are weakened by the inflation outpacing the income growth," the central bank said, adding that rapidly rising energy and labor costs in Latvia may weaken competitiveness.

LB estimates that the effect of the fiscal support provided during the heating season 2022/2023 (almost 700 million euros) on Latvia's real GDP will reach 0.64% and will slightly reduce the inflation level.

"Although the government measures are increasing the deficit, they are particularly important to help low-income population through energy crisis and safeguard the population against extreme energy price rises, at the same time preserving the energy saving incentives," LB said.

"The high degree of uncertainty stemming from the crisis could initially cause cautiousness in household spending. Nevertheless, the fall in the private consumption will be mitigated by part of the households releasing their previously made savings for a rainy day," it suggested.

Macroeconomic indicators: Latvijas Banka's projections

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