The words “macroeconomic forecasts” may not make the heart beat faster, but the ability to estimate expected developments in the national economy is very important in planning any state spending. The bigger the economy, the bigger the revenue in the budget, the more money to allocate for security, teachers, doctors and other needs. The Bank of Latvia’s assessment of the economy traditionally receives the most attention.
And in their latest forecasts, our central bankers outline a very important period in the Latvian economy. It’s time for a new business cycle.
Although this will still be a year of such moderate development and run-in, the expected growth of the gross domestic product is slightly reduced this year, but in the next developments it could start to approach the 4% mark. It is expected that the craziness of price increases is behind us and the rise in the cost of living will no longer put so much pressure on citizens’ wallets – neither in this year nor in the years to come.
“Inflation will be lower, which is good news for the majority of Latvian residents, who are consumers and live on fixed incomes. Prices will not continue to rise, wages will grow fast enough. We do not expect significant changes there, which means that in real terms, after deducting this price increase, the population’s income will increase,” says Uldis Rutkaste, Head of the Monetary Policy Department of the Bank of Latvia.
This should further promote consumption, while in the coming months the European Central Bank could begin to ease the shackles of high interest rates on the euro zone. Important news not only for borrowers, whose loans have become more expensive as a result, but also for important export markets for Latvia. Both in them and right here with us, new investments could be received, which are so necessary for the development of the economy. This in turn means both, for example, more or larger orders for our manufacturing industries and job builders.
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Among economists, however, there is no consensus regarding the forecasts of the Bank of Latvia regarding developments in the national economy in the coming years. Others believe they may be overly optimistic.
“The big unknown is what will happen to interest rates. If the story of interest rates is about such a slow decline, as it is now, then it is a very big question whether its recovery in the export markets will be as rapid as, I assume, in the forecast of the Bank of Latvia, taking into account what this rapid growth is in their forecasts for the next year as well in Latvia,” says Līva Zorgenfreija, Chief Economist of Swedbank in Latvia.
Central bankers, however, admit that the forecasts were made in conditions of high uncertainty. A lot of variables and unknowns – geopolitical upheavals, new sanctions or other rapid changes can significantly change the contours of the future scene. For example, one of the aspects is currently high on the social and political agenda of freight transport and other types of business with Russia. It can be torn from both sides – even with one decision in the Kremlin.
At the same time, the Bank of Latvia is reassuring. Already after Russia’s full-scale invasion of Ukraine, it is estimated that the impact of the entire economic cooperation with the aggressor is up to 2% of GDP. And in any case, we should try to break these ties. It is said to be sitting on a powder keg.
“It’s not painless, but at the same time, it’s not a reason for the crisis either. Yes, unemployment will increase slightly, but given that the labor market is warm, people will have opportunities to find work. Yes, there are regional issues, there is the issue of ports, there is the issue of Daugavpils, but all of them are matters to be resolved. If a tooth hurts and the tooth is incurable, then it is better to pull it out,” says Māriņš Kazāks, president of the Bank of Latvia.
The head of the Bank of Latvia called not to look for happiness in the markets, where, I quote, they are going to put us to sleep.
