European Commission downgrades Latvia’s GDP growth and upgrades inflation outlook

The European Commission (EC) has downgraded Latvia’s gross domestic product (GDP) growth outlook for 2022 from the previous 5% to 4.4%. Still, Latvia’s economic growth outlook is expected to be the most rapid among Baltic States.
At the same time, EC has upgraded the inflation outlook, expecting prices in Latvia to grow by 5.9% as opposed to the previous 3.6%.
EC also predicts Lithuania’s GDP will grow by 3.4% as opposed to the previously predicted 3.6%. For Estonia GDP is expected to grow by 3.1% as opposed to the previously predicted 3.7%.
European Union’s and Eurozone’s economic growth is expected to be 4% this year. Next year EU’s economy is expected to grow by 2.8% and Eurozones – by 2.7%, according to the EC.
EC Executive Vice-President Valdis Dombrovskis notes that, according to EC’s winter economic outlook, Latvia is expected to have the most rapid economic growth rate among Baltic States and it will exceed the average growth in the EU.
«Economic recovery in Latvia is expected to start with Q2, when the epidemiological situation is expected to gradually improve and certain restrictions are expected to be lifted. Economic growth will be driven by strong internal demand through economic stimulation activities. Economic growth will also come from a considerable influx of EU financing,» said Dombrovskis.
At the same time, risks for economic growth include inflation increase, which is dictated by the growing energy prices. «It it will reduce purchasing power in the EU and Latvia. It is expected for inflation in Latvia to reach 5.9% this year. However, it is expected in the second half of the year the situation on the energy market will stabilise and in 2023 inflation may stabilise and drop to 0.9%,» said Dombrovskis.
As for the fiscal policy, Dombrovskis says Latvia should focus on the reasonably rapid climb of budget expenditures, as well as economic support activities to make sure they are properly organised and do not cause a constant burden for state finances for the next several years.
Commenting on the general growth outlooks for EU’s economy, the EC notes that growth remains heavily affected by the Covid-19 pandemic. Most of the bloc’s member states still face considerable pressure for their healthcare systems and shortage of workers. Problems with logistics and supply chains and the shortage of raw materials will continue negatively affecting industrial production for at least the first half-year.
At the same time, the commission notes energy prices will remain high for a longer time than initially expected. This means slower economic recovery and affected consumer prices.
EC predicts inflation in the EU and Eurozone will increase this year to 3.9% and 3.5% respectively. Next year inflation will drop to 1.9% in the EU and to 1.7% in Eurozone.