Future growth of the Latvian economy is hampered by the international outlook as well as lack of structural reforms 1 February 2016
On 29 January 2016 this year's first Fiscal Discipline Council (Council) GDP working group meeting was held. Council members concluded that risks for macroeconomic imbalances are present, which in the future can endanger both economic growth and compliance with the Fiscal discipline law. Namely, wages have been growing faster than productivity for couple of years already, and in case this trend continues to prevail, export competitiveness is going to deteriorate. At the same time, investment sector is still fragile despite showing some growth in the middle of last year after two years of stagnation.
"Although at the moment we can observe rather solid GDP growth, current economic growth cannot be considered sustainable and sufficient. If current trends continue, the growth pace of Latvia’s economy, and thus the speed of convergence, will slow down. The major problem is low productivity growth that lags behind the wage increase. The current unemployment rate (slightly below 10%) should be considered close to its potential level in the context of Latvia’s labour market. This means that upward pressure for wages will persist and, most probably, will become even stronger. Particularly noteworthy is Riga where registered unemployment reached 5% at the end of 2015,"emphasises Head of the working group Mārtiņš Kazāks. "Wage increase per se is not a problem, slow productivity growth is."
"In general, the growth pace of Latvia’s economy currently can be evaluated as decent, however, policymakers should not expect similar growth prospects in the future. It should be considered that current circumstances – low investment level, productivity growth substantially lagging behind the wage increase, as well as a lack of structural reforms endanger sustainable economic growth. Moreover, current events in the global economy do not suggest near-term improvement in the economic environment. This negatively impacts Latvia’s potential GDP level," Council's member Morten Hansen concludes.