The Ministry of Finance has reduced Latvia’s GDP growth forecast for this year to 3% / Day

Starting with the preparation of the Latvian Stability Program for 2021-2024, the MoF has developed forecasts of macroeconomic indicators for the period until 2024.

According to the updated forecasts, Latvia’s GDP growth forecast for 2022 has been increased from the previously estimated 3.1% to 4.5%.

According to the Ministry of Finance, in the next two years the growth of the Latvian economy is forecasted close to the potential growth rate of the economy.

“Although the economic downturn in 2020 was 3.5% lower than projected, GDP growth in 2021 will be lower than projected in June last year due to restrictions on reducing the recurrence of Covid-19 and the spread of the disease.

The updated forecasts assume that economic development will continue to be negatively affected by the spread of Covid-19 until mid-2021, but then, with most restrictions lifted, growth will begin to recover rapidly.

The forecast is based on the Covid-19 vaccination plan, which envisages that 70% of the Latvian population will have been vaccinated by the end of this summer, thus a recurrence of the disease in autumn 2021 is not expected, “the Ministry of Finance said.

According to the Ministry, economic growth in 2021 will be ensured by a recovery of private consumption growth of 4%, investment growth and export growth by 4.1% and 4.3%, respectively, while public consumption growth will remain at last year’s level and amount to 2.4%. %. In turn, further acceleration of economic growth in 2022 will be ensured by both a complete recovery of private consumption and a rapid increase in investment, including a significant increase in investment by European Union (EU) funds.

The MoF’s forecasts for economic development over the next two years are generally close to the forecasts published by the European Commission (EC) on 11 February, which envisage that Latvia’s GDP will increase by 3.5% in 2021 and by 3.1% in 2022. “The differences in forecasts over the years are mainly due to a slightly different view of how fast the economic growth will decline in the first quarter of this year, as well as the fact that the EC has not yet included the impact of the European Recovery and Sustainability Mechanism in its 2022 forecasts,” the ministry explained.

The Ministry of Finance forecasts the average annual inflation in 2021 at the level of 1.4%, but in 2022 – at the level of 2%, at this level the average annual inflation will remain in the whole period until 2024.

The MoF explained that a faster rise in consumer prices this year will be determined by the recovery of global economic growth, including promoting oil and food prices in world markets, while internal factors – wage growth and recovery in consumption – will continue to drive up service prices in Latvia.

The average monthly increase in gross wages and salaries in 2021 is forecast at the level of 4%, in 2022 it will accelerate to 5% and will remain at this level throughout the period until 2024.

The unemployment rate, after a relatively modest increase in 2020, will increase slightly this year, reaching 8.3% at the end of the year, with the economic crisis in the labor market reflected with a slight lag. In turn, in 2022, as the number of employed population grows, unemployment, according to the forecasts of the Ministry of Finance, will again decrease to 7.1% of the economically active population.

In developing macroeconomic forecasts, the MoF has relied on conservative assumptions, as well as assessed external and internal environmental risks, which may turn out to be faster or slower than expected in the baseline forecast.

“The downside risks at present are mainly related to the prevalence of Covid-19 and the course of vaccination, including possible disruptions to vaccine supplies, disorderly logistics and new viral mutations. There are also upside risks associated with a sharp increase in construction activity and weaker recovery following the lifting of Covid – 19 restrictions, including possible bankruptcies and the growth of the shadow economy, “the ministry said.

In developing forecasts of macroeconomic indicators, the MoF has consulted with experts from the International Monetary Fund, the EC, the Bank of Latvia and the Ministry of Economics. Forecasts of macroeconomic indicators were approved on 11 February 2021 by the Fiscal Discipline Council.

In April each year, all EU countries submit EC Stability Programs or Convergence Programs, which contain Member States’ budget forecasts for the next three years, as well as updates for the current year. On the basis of these documents, the EC assesses the state of public finances and compliance with the conditions of EU fiscal discipline.

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