26.10.2022.

Macroeconomic Developments Report. September 2022

  • Latvijas Banka
    Latvijas Banka
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The Macroeconomic Developments Report is based on data from Latvijas Banka, Central Statistical Bureau of Latvia, Ministry of Finance, and Financial and Capital Market Commission, this publication assesses developments of the external sector and exports, financial market, domestic demand and supply, prices and costs, and balance of payments, and provides forecasts for the economic development and inflation.

High energy prices significantly hamper economic activity, and the baseline scenario of Latvijas Banka's forecasts provides for a short-lived recession. GDP contracted already in the second quarter, and it is estimated that the second half of this year and the beginning of the next year will see an even stronger slowdown of economic growth. Owing to the very high economic activity in the first quarter, the GDP forecast for 2022 points to a relatively high growth (3.0% in 2022) and is close to the previous forecast (+0.1 percentage point compared to the previous forecast). While the future prospects have deteriorated, the growth rate in the first half of the year exceeded projections overall.

The decline in economic activity will mainly be driven by the fall in private consumption triggered by the deteriorating purchasing power of the population. The decrease in private consumption will be partly mitigated by government support measures and by spending the savings accumulated during the pandemic. The increased costs and investor cautiousness will have a negative impact on investment dynamics, while public investment related to EU funds is expected to grow sharply in 2023–2024. The fall in exports of goods and services will be driven by both weak demand in trading partner countries due to the declining purchasing power and the already stocked European warehouses (e.g. with wood products related to the construction segment). The dates of entry into force of the sanctions, which are constantly supplemented, and the termination of previous contracts will be particularly relevant with regard to the range of imported goods (wood products, metal, oil products, coal), reducing the inflow of imported goods from Russia and Belarus. Imports of goods into Latvia will also be reduced by the overstocked warehouses. It was due to stockpiling that the ratio of imports to GDP reached a new record in the first half of 2022, and it will start to decline in the future. The drop in imports is estimated to be more significant than the decrease in exports. This will reduce the current account deficit in 2023–2024.

With the impact of adverse factors persisting at the beginning of 2023, the economy will experience stagnation next year. Cautious household spending and the postponement of the implementation of investment plans in the corporate sector are still projected to persist. Thus, the forecast for 2023 has been significantly revised downwards to –0.2% (–0.6 percentage point compared to the previous forecast).

It is expected that the economy will start its recovery as of the second half of 2023, with inflation returning to lower levels. In 2024, GDP is projected to post a 4.4% rise (+0.2 percentage point compared to the previous forecast), yet not reaching the level projected in June 2022. Stabilisation of price dynamics both on the external and domestic markets is expected to improve the sentiment of economic agents and increase demand, thus supporting both exports and production for domestic consumption as well as the implementation of investment projects.

The degree of uncertainty surrounding the GDP forecasts remains high. Household cautiousness and business downtime both triggered by the high energy prices may limit private consumption, manufacturing, profitability and thus also investment more severely than foreseen in the baseline scenario. Competitiveness of manufacturers, in particular that of European manufacturers compared to the rest of the world, may deteriorate due to higher costs. At the same time, investment in reducing energy dependency on natural gas and in enhancing energy efficiency can make a stronger contribution to the financial stability of the population and businesses.

Inflation is expected to be higher over the projection horizon, and it is mainly driven by higher food and energy prices. The inflation forecast for 2022 has been revised upwards to 16.9% (+2.1 percentage points compared to Latvijas Banka's June forecast), to 9.2% for 2023 (+2.2 percentage points) and to 3.4% for 2024 (+1.0 percentage point). The upward revision of forecasts is affected by higher current food and energy prices and by the outlook that the future level of these prices will nevertheless exceed previous assumptions. While the rise in inflation is somewhat delayed by government support, its impact on the average price level in the country is low, as it is the objective of supporting the low-income households that is mainly pursued. The increase in the inflation forecast for 2024 is affected by a higher increase in average wages projected against the backdrop of a tight labour market.

The uncertainty surrounding the inflation forecast is mainly caused by energy price fluctuations. They affect the level of consumer prices for these products directly and, given the role of energy in the production and supply of different goods and services, they will eventually be incorporated in the prices of other goods and services as well. In addition, the upward risk to the inflation forecast is linked to the possibility of relatively faster wage growth that could stem from both rises in the minimum wage and pressures to accelerate wage increases due to the current inflation.

Macroeconomic fundamentals:Latvijas Banka`s forecast

2022

2023

2024

Economic activity (annual changes; %; at constant prices; seasonally adjusted data)

GDP

3.0

-0.2

4.4

Private consumption

4.8

-4.7

5.9

Government consumption

3.4

–2.7

1.8

Investment

1.9

1.2

6.0

Export

5.3

0.0

3.2

Import

6.3

-3.5

3.7

HICP inflation (annual changes; %)

Inflation

16.9

9.2

3.4

COre inflation (excluding food and energy prices)

6.9

4.5

4.4

Labour market

Unemployment (% of economically active population; seasonally adjusted data)

6.7

6.7

6.3

Nominal gross wage (annual changes; %)

8.5

7.2

7.5

External sector

Current account balance (% from GDP)

–5.2

–2.9

–3.4

Government finances (% no GDP)

General government debt

45.0

44.4

42.9

Budget surplus/deficit

–7.9

–3.5

–2.6

APA: Banka, L. (2024, 28. mar.). Macroeconomic Developments Report. September 2022. Taken from https://www.macroeconomics.lv/node/5729
MLA: Banka, Latvijas. "Macroeconomic Developments Report. September 2022" www.macroeconomics.lv. Tīmeklis. 28.03.2024. <https://www.macroeconomics.lv/node/5729>.

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