Swedbank cuts growth projection, warns of rise of populism

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Swedbank has reduced its estimate of  Latvia's economic growth this year to 2.1 percent  from its previous estimate of 3 percent and warned of the threat of rising populism.

The GDP growth forecast has been cut mostly due to weaker than anticipated investment activity, explained Swedbank chief economist in Latvia Martins Kazaks on August 29.

According to Swedbank projections, Latvia's GDP will increase 3 percent in 2017 as investment growth will resume. GDP growth forecast for 2018 is at 3.3 percent.

Overall, the economic situation will improve in the coming years, and growth will accelerate, said Kazaks.

As reported, Latvia's GDP rose 2.1 percent in the first half of this year.

Swedbank also said it expected average inflation to remain at zero percent this year, or even deflation. In 2017, inflation in Latvia will increase to 2.5 percent, while inflation in 2018 will be 2 percent, Swedbank said.

In a separate paper on the wider economic picture, Swedbank gave more details of its Latvian outlook and also warned of the rise of populist politics is an "Achilles' heel" for global growth.

"Growth [in Latvia] is decent but not good. The economy grew 2.1% in the first half of 2016, slowed by a slump in investments. Construction is in recession. The labor market is tightening, however, continues and consumption growth remains robust. Exports have rebounded strongly after the weak turn of the year, but rising labor costs are eating into competitiveness. The credit cycle for corporates is about to turn positive; not yet for households. Unless supply-side reforms are sped up, growth of 3% is about its potential, above that pushed only by credit expansion."

"The government has started discussions on tax policy and other reforms to boost growth. These are promised to be a part of the 2018 budget. Unless growth-enhancing reforms are successfully implemented, with declining demographics and growth driven only through productivity, potential GDP growth is below 3% a year," Swedbank said.

"The combination of a less united Europe, strengthening protectionist sentiments and challenges to NATO’s integrity are rocking the fundamentals of the Western world and posing challenges to security, free trade, welfare, and stable and forward-looking policymaking. This creates an unfavourable environment for investment and productivity-enhancing reforms, and is at the core of the negative risk scenarios in our macroeconomic outlook... We therefore need ambitious reform agendas and brave economic policy makers to improve long-term prospects. Populism is not making it easier."

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