Macroeconomic Projections Report. October 2024
- While inflation has declined on a global scale, substantial challenges for further economic development persist as global uncertainty remains high and geopolitical tensions have continued to rise over recent months.
- Global energy commodity prices remain volatile due to geopolitical tensions, with price trends reversing since spring: the price of natural gas has gradually risen, while the price of oil has fallen.
- While the world's leading central banks are keeping to their tight monetary policies, they have also started to lower the degree of monetary policy restriction.
- Global growth continues to be moderate, with Latvia's foreign demand recovering slowly, consistent with earlier forecasts. The economies of Latvia's primary trade partners have shown varied developments. Manufacturing is experiencing an overall downward trend both in the euro area and globally, while consumer caution remains prevalent in many regions.
- A shift in euro area monetary policy has occurred, as the Governing Council of the ECB has begun a gradual easing of its restrictive monetary policy, resulting in more favourable financial conditions.
- Both lending activity and government securities market activity saw a slight increase, while interest rates exhibited a downward trend.
- The budget deficit is currently estimated to be above 3% of GDP (with the upcoming tax reform having minimal economic impact and being fiscally neutral for the budget). The deficit would be reduced if additional funds were raised outside the government budget for investment projects, including the construction of Rail Baltica. Slower economic growth will lead to a higher budget deficit and, with a growing need for borrowing, the government debt level will approach 50% of GDP.
- GDP growth is still projected to be sluggish, and the outlook for future growth has become increasingly pessimistic. The ongoing decline in competitiveness, coupled with already weak external demand, will hamper export recovery. This, in turn, is likely to reduce revenues for both consumers and investors, who remain cautious amid persistent geopolitical uncertainties.
- After last year's modest economic growth, this year's growth is expected to be lower than previously projected. In the short term, weak external demand is constraining manufacturing sector development, while consumer tendencies to build up savings are slowing trade growth. Over the medium term, weakening competitiveness is likely to impede the expansion of export sectors. Additionally, delays in implementing EU co-financed projects as well as the Rail Baltica project, coupled with a more pessimistic outlook for the Scandinavian market, are limiting growth opportunities in the construction sector.
- Under conditions of weak economic activity, unemployment rose to 7%. The recovery of economic growth, which is not expected to be as strong as previously estimated, does not allow unemployment to approach the 6% level projected in June for the medium term; this figure has been revised slightly upwards for the entire projection horizon.
- After this year's robust wage growth, the government's decision to cap the increase in the public sector wage bill, combined with weaker-than-expected economic growth, is anticipated to suppress wage growth next year. Meanwhile, the constrained labour supply and the rise in the minimum wage are expected to continue driving wage growth at a pace that exceeds productivity.
- Inflation in Latvia is currently low, with forecasts revised downwards in light of declining global resource prices, particularly for oil and food. However, an increase in prices for services in Latvia persists.
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