Fiscal Council: The productivity in Latvia has to be increased to sustain the forecasted economic growth rate  14 February 2018

Fiscal Council: The productivity in Latvia has to be increased  to sustain the forecasted economic growth rate

Fiscal Discipline Council (the Council) has approved the macroeconomic forecast for 2018 to 2021 prepared by Ministry of Finance (the MoF), which will be further used by the government in consultations with the European Commission during the budget preparation for the next year. The Council sees the macroeconomic forecast as realistic, however, there are concerns regarding the potential growth of economy, which could turn out to be lower than currently forecasted by the MoF. In this case, economic growth could slow down and there will be less available financial resources to cover expenditure.

"Currently, economic growth in Latvia is high, but it has to be monitored closely to see if it starts signalling of the overheating, which is reflected in the fast growth of inflation and wage increase" highlights Jānis Platais the Chairman of the Fiscal Discipline Council. "These tendencies are undesirable as they can create a threat to macroeconomic stability and worsen the State's financial situation in long term, as we saw this during the previous economic crisis."

In the latest macroeconomic forecast prepared by the MoF for time horizon until 2021 the real gross domestic product (GDP) growth is forecasted to be 4% this year and close to 3% in upcoming years; the inflation is expected to increase faster than forecasted before.

"The Council draws attention to the fact that inflation forecast for 2019 to 2021 prepared by the Ministry of Finance is made with caution. Number of risks can be observed that threatens the stability of economy and is an object of concern, as for example, the overheating of the labour market – currently, there is low unemployment in Latvia together with the labour shortage, which makes up the pressure on wage increase and inflation. Therefore, in these circumstances, to sustain the potential growth of economy as forecasted by the Ministry of Finance, the Council believes that productivity has to be increased significantly," emphasis Chair of the GDP working group of the Council Mārtiņš Kazāks.

"In the case if the actual inflation rate will turn out to be higher than forecasted currently, the Council will ask the Ministry of Finance to decrease the forecasted potential GDP growth rate and to increase the positive output gap between the potential and real economic growth," stresses M. Kazāks.

The Council also reminds the Ministry of Finance about previously suggested necessity to further develop the sensitivity analysis of macroeconomic scenarios by including following indicators – real GDP growth rate in %, total budget revenue, budget balance and budget deficit.

The Council has performed an evaluation of macroeconomic forecasts for the time horizon since 2004 and invites the Ministry of Finance to begin a regular assessment on macroeconomic forecasts in order to improve the modelling and data accuracy in the future.

According to the Memorandum of Understanding, the Council provides an early endorsement for the forecasted key macroeconomic indicators and encourages the government to start the work on preparation of the annual documentation – the Stability programme 2018 to 2021, next year's budget and medium term budget framework.

The Council approves the forecasted indicators by the Ministry of Finance – the real and nominal GDP growth, potential GDP growth and output gap, inflation and GDP deflator.

Presentation in the press briefing. The Council’s opinion on the Ministry's of Finance macroeconomic forecast is available here.