The Bank of Latvia reviews macroeconomic forecasts

The Bank of Latvia has published the latest (prepared in March 2024) macroeconomic forecasts. Short-term forecasts of both Latvian gross domestic product (GDP) growth and inflation have been reduced.

Economic growth in Latvia is expected to be sluggish this year, as demand in our main trade partner countries is weak. In Latvia, low inflation allows consumption to recover and investments are supported by government investments, but external demand has weakened, so the short-term GDP growth forecast has been reduced – to 1.8% in 2024 (from 2.0% in the December 2023 forecast). GDP growth forecasts for the following years are unchanged compared to the December forecasts – 3.6% in 2025 and 3.8% in 2026, respectively, and it is expected that more growth capacity will be given by the increase in exports as the economic environment abroad improves.

In the short term, the inflation forecast is somewhat lowered by lower global natural gas prices – thus the March forecast for Latvia’s average inflation in 2024 is 1.5% (in December 2023 it was forecast that inflation in Latvia would be 2.0% in 2024), in 2025 1.9% (December forecast was 2.3%) and 1.8% in 2026 (unchanged compared to the December forecast). In the medium term, inflation will continue to be affected by persistent wage growth, which prevents core inflation (a measure of inflation excluding energy and food prices) from falling as fast as headline inflation. The increase in labor costs creates risks for the growth of the Latvian economy and the sustainability of competitiveness.

The Bank of Latvia’s latest economic forecasts were developed under conditions of still high uncertainty.

Briefly about the most important1, which can be read in detail in the “Macroeconomic Forecasts Review”, which will be published at the beginning of April on the “makroekonomika.lv” website.

• Although inflation has also significantly decreased globally, the challenges for the further development of the world economy are still significant – uncertainty in the world remains at a high level and events show an increase in geopolitical tension.
• Despite faster growth in the world as a whole, external demand in Latvia’s main trade partner countries, especially Estonia and Germany, is estimated to be slightly weaker. However, in the medium term, a gradual improvement of the situation in external markets is expected.
• In the Eurozone, inflation and economic growth are forecast to be lower than in the December forecasts, and although the ECB Council continues to implement a restrictive monetary policy, financial markets expect that the turning point is not far away, so financial conditions in the Eurozone have already become more favorable.
• Despite expectations of lower interest rates in the future, caution is felt in the banking sector, both from the side of credit demand and supply.
• The assessment of the general government budget balance for this and next year has not changed significantly. On the other hand, at the end of the forecast period – in 2026 – the deficit is predicted to be larger, as larger government investments are expected than previously expected. For 2024, the budget deficit is forecast at 4.1% of GDP, for 2025 – 3.4% of GDP, and for 2026 – 2.3% of GDP.
• The level of public debt has been adjusted upwards due to the expected weaker nominal GDP growth together with lower inflation. The national debt level for 2024 is forecasted at 44.3% of GDP, for 2025 and 2026 at 45.2% and 45.7% of GDP, respectively.
• GDP growth is reduced in the short term – to 1.8% in 2024 – due to weaker external demand. The medium-term growth outlook remains unchanged at 3.6% in 2025 and 3.8% in 2026.
• In the short term, a more subdued activity of the manufacturing industry and the transport sector is expected due to the weakness of external demand. The greater inertia of retail sales is maintained by a slow improvement in consumer sentiment, despite an increase in purchasing power. The outlook on construction growth has not changed significantly: progress of large infrastructure projects with EU fund financing and a gradual increase in investment in the private sector will support construction.
• The unemployment forecast is slightly increased for the near term due to weaker economic activity. For 2024, it was increased to 6.5% and for 2025 – to 6.3%. In 2026, the unemployment rate will remain at the previously forecasted level of 6.1%.
• The salary forecast is not changed, and the forecasted growth remains above the long-term average, namely 8.0% for 2024, and 7.9% and 7.6% for 2025 and 2026, respectively.
• The inflation forecast for 2024 and 2025 has been reduced to 1.5% and 1.9%, respectively. This is most significantly affected by significantly lower global natural gas prices. The inflation forecast for 2026 remains unchanged (1.8%).

Forecasts are prepared using information available until March 19, 2024 (for certain technical assumptions – until March 5).

1 Changes in economic developments and indicators forecasts are compared with previous forecasts published in December 2023.

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