As Coface reports, the Latvian economy already returned to its pre-pandemic level in 2021. Government measures and exports’ acceleration supported economic activity, especially in the first three quarters of 2021. However, the last quarter of 2021 indicated a weaker performance due to rapidly rising infection rates that prompted a tightening of containment measures. Nevertheless, the economic recovery is expected to strengthen in 2022, against a backdrop of rising vaccination rates. Strong wage growth and accumulated savings will support household consumption as the main growth driver. Wage growth is supported by increasing job vacancies, while the unemployment rate (6.7% in October 2021) has not yet declined to the pre-pandemic level. Inflation is the price to pay when the focus switches from market and labor productivity.

The acceleration in household consumption will be hampered by high inflation. “The general form of a Cantillon effect is that there is increased money coming into an economy from somewhere. The first recipients benefit. They spend it according to their preferences, and this causes certain prices to go up. The sellers of those goods benefit from the new money, while others who only face higher prices are hurt.” This expansion of money comes from Central Banks, which expand the money supply either by printing money or by adding zeros to the accounts that commercial banks and entities have with them. As a result, global energy prices have soared, pushing up the domestic prices of fuel, heating, gas, and electricity.

Exports will be supported by demand from the EU, which remains the main trading partner. Latvia already benefitted from a surge in foreign demand, particularly for mineral products, iron and steel, machinery and equipment, and chemical and wood products. Nonetheless, imports are expected to rebound even stronger and, therefore, make the contribution of net exports to GDP growth negative. Gross fixed capital formation will benefit from EU funds inflows. Moreover, investments in real estate are expected to increase, which is already reflected in the rising number of building permits. After the pandemic receded following the initial wave, households are again willing to incur mortgage loans. Nonetheless, companies’ investments were relatively stagnant with still a high level of uncertainty.

Mises could be describing: “For the naive mind there is something miraculous in the issuance of fiat money. A magic word spoken by the government creates out of nothing a thing that can be exchanged against any merchandise a man would like to get. How pale is the art of sorcerers, witches, and conjurors when compared with that of the government’s Treasury Department! The government, professors tell us, “can raise all the money it needs by printing it.” Taxes for revenue, announced a chairman of the Federal Reserve Bank of New York, are “obsolete.” How wonderful! And how malicious and misanthropic are those stubborn supporters of outdated economic orthodoxy who ask governments to balance their budgets by covering all expenditures out of tax revenue!”

Last year’s fiscal deficit soared on the back of support measures (totaling nearly 5% of GDP). Additional support measures mostly include an increase in non-taxable income tax allowance (from EUR 300 in 2021 to EUR 500 in June 2022), increases in wages for healthcare and social workers as well as teachers, and an investment package to support the economic recovery. Additional funds are also allocated for regional and municipal development. Latvia has been allocated 6.7% of 2020 GDP in grants from the EU recovery fund, of which 35% is expected to be spent by 2023. About 60% will be devoted to tackling climate change and accelerating Latvia’s digital transformation. Although public debt surged during the pandemic, it remains relatively low by European standards. It contributes to low debt-servicing costs (less than 1% of GDP). The external debt exceeds 120% of GDP and is a consequence of previous high current account deficits. It remains the highest among EU countries but is diminishing.