The Bank of Latvia raised its GDP growth forecast for 2021 from the previously estimated 2.8% to 3.3%, according to information published by the bank.
Meanwhile, the central bank also raised Latvia’s economic growth forecast for 2022 from an estimated 5.3% in December to 6.5%.
It is estimated that Latvia’s GDP growth in 2023 will be 3.6%.
The Governor of the Bank of Latvia, Martis Kazaks, explains that the March forecast is more optimistic than in December 2020, thanks to supportive monetary policy and favorable financing conditions, as well as broad fiscal policy support for businesses and citizens to help them overcome Covid 19.
Assuming that vaccination continues as planned, epidemiological constraints are expected to ease in the second half of 2021, which in turn is expected to improve the general mood of consumers and businesses. The Bank of Latvia expects that the measures introduced to improve household incomes and use the savings accumulated during the epidemic will have a positive impact on private consumption.
“On the one hand, rapid wage growth is hampered by high labor supply and limited financial resources available to companies. Meanwhile, consumption has also been boosted by increases in the minimum wage, the issue of doctors ‘and teachers’ salaries, as well as short-term bonuses paid to medical staff for working with Covid-19 patients and one-off benefits for certain groups. The rapid growth of public consumption is related to the increase in financial support, which aims to limit the impact of the crisis, said Uldis Rotkasti, Director of the Bank of Latvia’s Monetary Policy Office.
He added that investment decisions will be made on the basis of improving the general mood of the country’s economy, as well as funding available from the European Union’s recovery and sustainability mechanism.
According to the Bank of Latvia’s forecasts, export growth is expected to be close to external demand, as Latvia’s trading partners slowly overcame the crisis with losses below the EU-wide average, making their main positions generally better. Exports of goods in the second half of 2020 and improving sentiment in all areas will gradually revitalize the service sectors affected by the restrictions. Imports of goods and services will increase sharply as external and domestic demand increase.
State aid helps maintain the supply capacity of the national economy and protects against a major wave of bankruptcies and possible unemployment.
This is because as the spread of the virus decreases and demand increases, the country’s economy will be able to recover more strongly, says Rothkast.
The Bank of Latvia estimates that the state aid measures announced to stop the second wave of Covid-19 affect the state budget deficit and may increase Latvia’s GDP by 3.5%. Maintaining short-term incomes helps mitigate the negative effects of the crisis, but government support should focus on promoting long-term growth after the end of the Covid-19 pandemic, Rotkaste said.
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