Bank of Latvia downgrades country’s economic growth outlooks

Latvia’s central bank has downgraded the GDP growth outlook for 2021 from 5.3% to 4.6%.
At the same time, the bank has downgraded Latvia’s economic growth outlook for 2022 from the previous 5.1% to 4.2%. For 2023, however, the GDP growth outlook is 4% as compared to the previous 3.8%. For 2024 GDP growth is expected at 3.3%, according to the Bank of Latvia.
The bank notes GDP outlooks for 2021 and 2022 were downgraded due to the impact of the pandemic on the national economy.
«The short-term economic growth outlook was impacted by Covid-19 outbreaks, especially in Europe, as well as the appearance of new variants of the virus and measures put in place to limit the spread of the virus. Growth of the national economy is delayed by the rise of prices of materials, equipment and shortage of labour force, as well as costs, especially energy prices,» according to representatives of the Bank of Latvia.
The central bank also mentions that the leading central banks, including European Central Bank, continue supportive monetary policies. Although inflation has reached unprecedented levels, it is largely dictated by increased energy prices and other passing factors. This is why a reduction of the monetary policy’s support would not be beneficial for the national economy. Under these conditions it is necessary to adopt focused fiscal policy support measures.
According to the Bank of Latvia, the country’s economic growth has slowed due to the epidemiological situation. The bank’s experts had expected the situation to decline as far back as September. However, since then the government has implemented a number of restrictive measures.
In Q3 2021 private consumption recovered. However, foreign trip expense also increased with no real contribution to Latvia’s national economy.
Increased costs of construction materials and machines exceed the costs estimated in investment plans, slowing overall activity. Export remains limited by epidemiological restrictions that limit access to services.
«At the beginning of next week, Latvia’s national economy will remain in the shadow of the pandemic. On top of that, residents also have to deal with the Covid-19 certificate requirement and general epidemiological restrictions in Europe,» Bank of Latvia experts stress.
At the same time, the Bank of Latvia believes the factors that limit the growth of the economy will calm down next year.
«We expect global factors like the growth of energy prices and supply disruptions to calm down in the second half of next year,» the Bank of Latvia reports, adding that businesses in Latvia are less subjected to problems of raw material supplies than business in other European countries.
Experts of the bank also notes that investments will play an important role in economic growth, which is something expected from NextGenEU and Rail Baltica.
Even if construction materials’ price rise delays investments and corporate lending remains weak, the shortage of qualified workers will contribute to automation processes.
«With uncertainty reduced, the savings accumulated during the period of restrictions will be spent, increasing private consumption. Export development will be dictated by recovery of foreign demand. It is assumed the competitiveness of costs will not reduce Latvia’s global market share,» notes the Bank of Latvia.
The central bank also notes the rise in unemployment is limited thanks to better adaptation to remote work and state aid for the period of restrictions. Nevertheless, the requirement for Covid-19 certificates for work in person may increase the number of unemployed people in the country.
The Bank of Latvia mentions the deficit of the general government budget is on a rise because economic growth is becoming slower. On top of that, the government continues increasing costs to lower consequences from Covid-19. These costs in 2021 exceed those of 2020 more than 2.5 times.
The Bank of Latvia expects budget deficit to reach 8.2% of GDP in 2021, 4.1% in 2022, 1.3% in 2023 and 0.4% in 2024.