Published: 27.03.2024

Latvijas Banka has published its latest macroeconomic forecasts (prepared in March 2024). The short-term forecasts for Latvia's GDP growth and inflation have been revised downwards.

 

GDP growth forecast

Latvia's economic growth is projected to be sluggish this year due to weak demand from Latvia's main trade partners. The low inflation facilitates recovery of consumption and the government investment fuels overall investment growth in Latvia, whereas external demand has weakened. Consequently, the short-term GDP growth forecast for 2024 has been revised to 1.8%, down from 2.0% projected in the December 2023 forecast. The GDP growth forecasts for 2025 and 2026 remain unchanged compared with the December forecasts – at 3.6 % and 3.8 % respectively. With the external economic environment improving, exports are expected to expand, thereby providing stronger momentum for growth.

 

Inflation predict

The short-term inflation forecast has been revised slightly downwards due to lower global gas prices. As a result, the March forecast of Latvia's average inflation predicts 1.5% for 2024 (2.0% in the December 2023 forecast), 1.9% for 2025 (2.3% in the December 2023 forecast) and 1.8% for 2026 (unchanged from the December 2023 forecast).

Over the medium term, the persistent rise in wages will further influence inflation, preventing the core inflation (inflation excluding energy and food prices) from decreasing as rapidly as the headline inflation.

Rising labour costs present risks to Latvia's economic growth and the resilience of competitiveness.

 


Latvijas Banka's latest economic forecasts have been drawn up amid persistently high uncertainty.

Macroeconomic fundamentals: Latvijas Banka's forecasts

 

2024

2025

2026

Economic activity (annual changes; %; at constant prices; seasonally adjusted data) 
GDP 1.8 3.6 3.8
Private consumption 2.8 4.0 3.6
Government consumption 3.7 1.0 0.0
Investment 5.5 4.4 5.2
Exports –0.2 3.3 3.5
Imports 0.8 3.2 2.7
HICP inflation (annual changes; %) 
Inflation 1.5 1.9 1.8
Core inflation (excluding food and energy prices) 4.0 3.6 2.9
Labour market
Unemployment (% of the economically active population; seasonally adjusted data) 6.5 6.3 6.1
Nominal gross wage (annual changes; %) 8.0 7.9 7.6
External sector 
Current account balance (% of GDP) –4.3 –4.3 –3.8
Government finances (% of GDP)
General government debt 44.3 45.2 45.7
Budget surplus/deficit –4.1 –3.4 –2.3

 

Summary of the key information*Economic developments and forecast revisions have been compared with the previous forecasts published in December 2023.
, with more detail provided in the Macroeconomic Projection Report which will be published on the website www.macroeconomics.lv in early April.

  • While inflation has also significantly declined on a global scale, substantial challenges for further global economic development persist as global uncertainty remains high and some developments point to rising geopolitical tensions.
  • Despite more buoyant global growth overall, external demand from Latvia's main trade partners, Estonia and Germany in particular, is estimated to have weakened. Nonetheless, the situation in external markets is expected to gradually improve over the medium term.
  • In the euro area, inflation and economic growth forecasts have been revised downwards compared to December 2023. While the Governing Council of the ECB maintains tight monetary policy, the financial markets anticipate that the pivot is not far off. Consequently, the euro area financial conditions have already become more favourable.
  • Despite expectations of upcoming interest rate cuts, the banking sector exhibits cautiousness both in terms of credit demand and its supply.
  • The assessment of the general government budget balance both for this year and for 2025 has remained broadly unchanged. Based on assumptions that the government investment will increase more than previously anticipated, the budget deficit is projected to rise towards the end of the forecast period in 2026. The budget deficit is projected to stand at 4.1% of GDP in 2024, 3.4% of GDP in 2025 and 2.3% of GDP in 2026.
  • Due to the expected weakening of nominal GDP growth and decline in inflation, the government debt level has been revised upwards to 44.3% of GDP for 2024 and to 45.2% and 45.7% of GDP for 2025 and 2026 respectively.
  • The short-term GDP growth forecast for 2024 has been revised downwards to 1.8% due to weaker external demand. The outlook for medium-term growth has remained unchanged at 3.6% for 2025 and 3.8% for 2026.
  • Given the weakness of external demand, the activity in the manufacturing and transport sectors is expected to be lower in the short term. Retail trade has exhibited more inertia as consumer sentiment, even with a rise in purchasing power, is improving only slowly. The outlook for the construction sector growth has remained broadly unchanged: the sector will be supported by the progress in large infrastructure projects implemented with EU funding and a gradual expansion of investment in the private sector.
  • In the light of weaker economic activity, the unemployment forecasts have been revised upwards to 6.5% and 6.3% for 2024 and 2025 respectively. The unemployment forecast for 2026 has remained consistent with its previous forecast at 6.1%.
  • There have been no revisions to the wage forecast, with the projected increases in wages remaining above their long-term averages at 8.0% for 2024 and at 7.9% and 7.6% for 2025 and 2026 respectively.
  • Meanwhile, the inflation forecasts for 2024 and 2025 have been revised downwards to 1.5% and 1.9% respectively primarily due to a significant decline in global gas prices. The inflation forecast for 2026 has remained unchanged at 1.8%.

The cut-off date for the information used in the forecast is 19 March 2024 (and 5 March for the information used in some technical assumptions).

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