The Bank of Latvia has upgraded the country’s GDP growth outlook for 2022 from the previous 2.9% to 3%, as reported by the bank’s monetary policy department head Uldis Rutkaste.
High energy prices have impacted the outlook for economic activity. However, high growth observed at the start of the year allows for keeping GDP outlook close the previous estimate, said Rutkaste.
If unfavourable factors remain at the start of 2023, Latvia’s national economy will stagnate, the Bank of Latvia predicts. This is why the outlook for 2023 is significantly downgraded: to -0.2% when compared to the 2.4% predicted in June.
The outlook was downgraded because, according to the central bank, the price and cost increase will weaken economic activity at the end of the year, explained Rutkaste.
In 2024 Latvia’s GDP growth is expected to reach 4.4% (4.2% was predicted in June).
Similarly to June’s outlooks, the central bank predict that recovery of Latvia’s national economy is expected to start in the second half-year, as inflation returns to lower levels.
At the same time, Rutkaste stressed that the outlook was put together under conditions of high uncertainty, which is largely caused by the unpredictable nature of the Russian-Ukrainian war and development with global prices, especially with energy resources.
The Bank of Latvia predicts the general government debt will reach 45% of GDP in 2022, 44.4% in 2023 and 42.9% in 2024.
Budget deficit is expected at 7.9% of GDP this year, 3.5% of GDP in 2023 and 2.6% of GDP in 2024.
Unemployment is expected to reach 6.7% this year, 6.7% next year and 6.3% in 2024.
Nominal gross wages are expected to increase by 8.5% this year, 7.2% next year and 7.5% in 2024.
Bank of Latvia governor Mārtiņš Kazāks said economic growth in Eurozone will be come slower as well. High inflation, supply chain and energy supply disruptions, as well as pessimistic outlook, will reduce consumption and production.
He reported that this September the European Central Bank predicted GDP growth in Europe to reach 3.1% in 2022, downgrading the outlook to 0.9% in 2023 and 1.9% in 2024.
Kazāks explained that the recession in Latvia’s economy may have already started. He expects it to become visible in numbers around the end of 2022. He did say the situation is expected to improve next year.
The Bank of Latvia has no concerns in regards to the risk of a deep recession. According to the governor of the central bank, it will be «shallow and brief».
He stressed the government needs to provide companies and households with reasonable support in order for them to make it through the energy resource price crisis. At the same time, it is necessary to ensure structural reforms in the economy to avoid an energy crisis next year.
Rutkaste reported that the external environment will be less favourable for Latvian exporters than previously expected. Import prices are on a rapid rise. While at the start of the year it was possible to compensate export price rise, the situation has changed because lumber and food prices have dropped since then.
Rutkaste predicted that in the coming quarters the rise of import prices will be felt even more in Latvia.
He also added that price growth has started slowing down. Some sectors already indicate negatives.
A drop is also observed in wholesale trade, which can be linked to anti-Russian sanctions. Trade activity in Latvia and other countries will decline due to previously formed stores of raw materials.
The drop in residents’ purchasing power is also reflected in payment card use data, because the volume of goods and services purchased has started going down. Rutkaste explained that private consumption is starting to weaken. Deposit growth is also starting to slow down.
At the same time time, Rutkaste said residents have started using the money they saved during the pandemic. This is why private consumption will not go down as rapidly as residents’ actual income.
As for investments, Rutkaste mentioned that construction-related investments are slowed by increase in costs. The uncertainty deters companies from long-term borrowing. At the same time, there is an increase observed for investments for the purchase of vehicles and production equipment. Rutkaste linked it to airBaltic’s continued purchase of aircraft. He also added that many companies are also engaged in procurement of production equipment.
Household lending is on a slow and stable rise. Corporate lending is on a rise as well. It was very weak in the past. Although lately there has been a breakthrough, the lending portfolio continues going down, admits the expert.
Export and import activity keeps growing rapidly. A large portion of this increase comes from price rise, Rutkaste explained. Export volumes remain positive, but imports have increased more rapidly than exports so far.
Export is held back by expectations of a recession and weak demand. There is also the price drop observed for certain raw materials.
Rutkaste admitted that export volumes to Russia have not only not gone down this year, but have increased when compared to pre-war period. A drop was only observed in the first months of the war, but after that export volumes headed for Russia started going up again. The central bank’s expert explained that export volumes to Russia mostly consist of pharmaceutical products, as well as different mechanisms and equipment, including electrical appliances.
He added it is clear that many companies have not changed their direction. 80% of companies that export goods to Russia. This market composes more than 50% of the total volume of exports.
He also said that as unemployment goes down, the situation on the labour market in Latvia remains tense. At the same time, the residents’ income level, which is still below the inflation level, reduces their purchasing power and consumption.
Government’s support during the energy resource price crisis and use of households’ savings helps partially cushion the drop in households’ consumption activity and worsening of the financial situation of different companies. The government support announced for the 2022-2023 heating season – approximately EUR 740 million – will have an effect on Latvia’s GDP at the level of 0.64%, according to the Bank of Latvia. This will slightly reduce inflation. Rutkaste said economic decline would be even greater without this support.
Kazāks explained that the Latvian government’s measures increase budget deficit, but it is especially important for low-income households during the energy price crisis. This support is also important to help keep residents safe from extremely high energy price surges.
In 2021 Latvia’s GDP increased by 4.5%.