Council highlights the global and local risks that may reduce economic growth in the coming years  17 February 2020

The Council considers that the MoF macroeconomic projections for the period 2020-2023 are realistic and acceptable, but points to a number of risks, in particular in 2021/22.

The Council wishes to highlight the global and local risks that may reduce economic growth in the coming years, especially in 2021/22:
For the second year in a row, the winters in Latvia are warmer than normal. This has an impact on the performance of the energy market and the forestry sector. It is expected that this trend will continue and will have a negative impact on economic growth in Latvia in the coming years.
Regarding 2022, the volume of public investment may decline following the downturn in the absorption of EU funds. One may expect that the confidence in the construction sector is likely to go down as early as in 2021, as the construction industry will be waiting for signals of the start of the next EU funding cycle.
As the significant risk, the Council note the downturn of the freight volume in transit sector, which began in 2019, may continue in  2020-2022, especially in the port segment, as freight operators have already invested in shifting freight flows to other ports, and additional costs for the reorientation of freight flows would create undesirable costs.
At the same time, the commercial banking sector in Latvia has demonstrated very low lending activity, and non-residents currently meet difficulties in opening and managing accounts. Further consolidation in banking sector is also possible and creates an additional risk.
Council also stress the attention on the unpredictable effects of (COVID-19) epidemic, which has already had a negative impact on global economic performance in 2020.
The previously indicated risks also remain important, including uncertainty about China's relations with its trading partners, including the EU and the US, and the final agreement on Brexit.
The MoF’s forecast of real GDP growth for 2020 is conservative (2.2%) and largely in line with the European Commission's estimates. At the same time, it is by 0.4 %p. lower than the real growth forecast of the Bank of Latvia and by 0.6 %p. lower than forecast of the International Monetary Fund forecasts.
The inflation rate forecast for 2020 is conservative (2.3%) and consistent with European Commission's data- and is lower than forecasts by Bank of Latvia and the International Monetary Fund.
Average gross wage growth in 2020-2023 is projected to be stable at an average of 5.4%, which will be a stimulating factor for private consumption.
Macroeconomic forecasts prepared by the Ministry of Finance will be used for drafting Latvia’s Stability Program (SP) 2020/23, which is scheduled to be submitted to the Cabinet of Ministers in mid-April 2020.

Opinion on the Ministry of Finance's macroeconomic forecast available here.

Macroeconomic indicators (MS Excel table) available here.