Latvian Finance Ministry cuts growth forecast

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The Ministry of Finance (FM) said February 14 it has developed macroeconomic forecasts for the period up to 2025. 

According to the updated forecasts, Latvia's gross domestic product (GDP) is expected to increase by 4.0% in 2022, and at 3.9% in 2023.

Compared to previous forecasts made in June 2021, the GDP growth forecast for 2022 has been reduced by one percentage point, but for 2023 GDP growth is forecast to be 0.4 percentage points higher than in June last year.

In 2021, Latvia's economic growth, according to preliminary estimates, reached 4.7%, so the Ministry is not predicting a massive economic boom if and when the Covid-19 crisis subsides over the next two years.

Latvian Finance Ministry economic forecasts, Feb 2022
Latvian Finance Ministry economic forecasts, Feb 2022

"However, with the end of the emergency and the full recovery of economic activity in 2022, strong growth in private consumption is expected to reach 5.3%, which will be somewhat limited by the declining purchasing power of the population as a result of soaring prices," the Ministry said. 

Inflation is expected to remain high. The Ministry of Finance forecasts average annual inflation for 2022 at the level of 6.2%, increasing from 3.3% last year. 

"The high inflation rate this year, as in the second half of 2021, will be determined by the sharp rise in energy prices, which will increasingly be reflected in the prices of other goods and services. In the first half of the year, inflation will remain high at 7-8%, while in the second half of the year, as energy prices stabilize, overall consumer price inflation will slow down and inflation is expected to fall to 3.1% in 2023. Inflation will continue to decline over the next two years, stabilizing at 2% by 2025," the Ministry predicted.

After a rapid increase of about 10% in 2021, the average monthly wage will continue to increase relatively rapidly this year, which will be determined by the limited supply of labor and rising prices. Overall wage growth in the country is projected at 7.5% this year, then declining gradually and stabilizing at 5% by 2025. 

Unemployment will continue to decline at the previously projected pace, falling to 6.9% in 2022 and further declining to 6.5% in 2023.

The Ministry of Finance's forecasts for economic development in the coming year are slightly more cautious, but in general close to the forecasts published by the European Commission (EC) on February 10, which forecast that Latvia's GDP will grow by 4.4% in 2022 and by 3% in 2023. The forecasts are also similar to those produced by the Latvian central bank at the end of 2021.

The Ministry said its forecasts were based on "conservative assumptions", as risks to economic growth are now more on the downside, as a result of geopolitical tensions in the region, the effects of the Covid-19 pandemic, and rising energy prices.

Full forecasts of FM macroeconomic indicators are available on the Ministry's website.

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