With the schedule for the preparation of the state budget for 2023 pushed back, the Ministry of Finance reports it has «updated» the outlook for macroeconomic indexes for 2022-2025.
Considering the dynamic of Latvia’s GDP in Q3 2022, as well as the expected slowdown of economic growth in Latvia’s main foreign trade partner country, the GDP growth outlook is downgraded to 1.6% for 2022, whereas for 2023 the ministry expects GDP to go down by 0.6%. This means that when compared with the previous macroeconomic outlooks, the outlook presented in August has had its GDP growth outlook by 1.2 percentage points for 2022 and by 1.6 percentage points for 2023.
Following the recovery of private consumption after Covid-19 restrictions and limited influence from the war, the economic growth in Latvia reached 4.1% in the first half of 2022. In the second half of the year, however, the high prices and lower purchasing power caused consumption growth rates go down. This worsened the situation for Latvian producers and maintained investment levels at a low level. This caused Latvia’s GDP go down by 0.6%. The economy is expected to go down again in Q4 2022. High energy resource prices, increased production costs and weak demand in external markets will continue negatively impacting Latvia’s economy in the first half of 2023.
Economic growth will start recovering around mid-2023.
This is why 2024 and 2025 are both expected to show a positive dynamic, as GDP growth may reach 3.0%.
Compared with the outlook from August, the updated macroeconomic outlook also slightly upgrades the inflation outlook for 2022 and 2023. According to the updated outlook, consumer price growth will reach 17.3% in 2022. In 2023, on the other hand, consumer prices will go down 8.5%. This is 0.8 and 2.0 percentage points more than what was listed in the outlook published in August. Pressure from inflation will go down in the next two years. It is expected to stabilise at 2.0% by the year 2025.
In the updated macroeconomic outlook the Ministry of Finance maintained the assumption the geopolitical situation will not worsen too much and ongoing warfare will not escalate. The ministry also does not expect Covid-19 pandemic to go up significantly, which would otherwise require imposing new gathering, business and other restrictions. At the same time, the ministry also outlined external and internal environment risks, adding that outlooks are put together in a situation of increased uncertainty. The biggest negative risks are related to the geopolitical situation, as well as rapid energy resource price fluctuations and their limited availability, which will further negatively impact economic growth.
Also read: Latvia’s GDP down by 0.6% in Q3 2022