The Latvian central bank has published its macroeconomic forecasts for GDP and inflation. Latvia’s GDP growth forecasts for 2021 indicate a GDP increase of 3.3% and 6.5% in 2021 and 2022 respectively. Meanwhile, inflation forecasts have been revised upwards to 2.0% in 2021 and 2.9% in 2022. With the number of vaccinated people growing and the Covid-19 infection rate declining both globally and in the country, restrictions to contain the pandemic are being gradually relaxed. This, hand in hand with the accommodative monetary policies implemented by major central banks and the government support still provided to businesses and households, will ensure economic recovery.

During the second wave of the pandemic in Latvia, the government expanded its support to businesses and households. Therefore, despite the restrictions applied at the beginning of the year and low mobility, GDP decreased less in the first quarter than during the first wave of the pandemic. Sentiment from economic agents and business employment expectations have improved rapidly since April. The retail and manufacturing sectors are also already performing well. A further easing of restrictions will be reflected in economic growth, as services become more available and households will be able to spend the savings accumulated during the pandemic. These developments give reason to forecast GDP growth of 3.3% already this year.

Along with high consumption, the funds available under the Recovery Fund will increase in the coming years. Thanks to resilient demand for export goods, namely electronics, wood and pharmaceuticals, and agricultural products, last year’s record exports will be surpassed. At the same time, risks remain with regard to supplying chain disruptions, the sustainability of demand for wood, and the high prices of building materials. Looking at services exports, sectors less dependent on face-to-face contacts continue to develop, while air transport and travel services are expected to recover only after a more substantial improvement in the pandemic situation. With domestic demand spurring import growth, the current account balance, after a significant surplus recorded last year, will again be close to zero. Government support has helped businesses meet liquidity needs, prevented a wave of mass defaults, and slowed unemployment growth. As the economic situation improves, public support will become less intense and there will be a need for targeted support for profitable enterprises, thus ensuring that resources are directed towards productive enterprises.

In view of the fact that the pandemic is only gradually receding, government support has been extended for this year and social spending will increase in subsequent years, among other things due to changes in childcare allowance. Thus, the general government budget deficit forecast for 2021 has been revised upwards to 9.9% of GDP. The budget deficit forecasts for 2022 and 2023 stand at 2.1% and 0.8% of GDP respectively. Given that, even in 2022, EU countries will be granted some flexibility with regard to fiscal rules, the risks of a larger deficit remain high.

The rapid rise in wages and the reduction of unemployment in the labor market are in contrast to the decline in economic activity at the beginning of the year. The employment expectations of companies have improved and the number of registered vacancies has already increased in April. However, unemployment is not expected to fall rapidly as redundant employees would be the first to return to work. In addition, the most affected sectors, which are also labor-intensive ones, should only recover gradually. The Latvian central bank has not changed its estimate of a decline in the unemployment rate from 8.3% in 2021 to 7.0% in 2023. Labor shortages and skills imbalance will support an increase in average wages of 6.9% in 2021 and almost 5.5% in the coming years.

Year-on-year consumer price inflation has been positive since March and reached 2.6% in May. The rise in prices is mainly driven by raw materials, services, repressed demand, social distancing measures, and rising minimum wages. Inflation is projected to stand at 2.0% in 2021. It will continue to rise and reach its maximum level, above 3.5%, between 2021 and 2022. While core inflation is expected to rise further, the impact of supply-side factors, such as pressure on commodity supply chain disruptions and rising oil prices, is expected to decrease and inflation to stabilize at around 2%.