On macroeconomic forecasts by Latvijas Banka
In 2018, Latvia's economic development was faster than expected and maintained the momentum achieved in the previous year. It continued to be driven by domestic demand supported by the strong rise in disposable income and investment activity. By contract, in the second half of 2018 several countries started to experience slowdowns in their pace of economic growth, with the economic and geopolitical risks associated with the external developments remaining significant. This has also started to be reflected in relatively weak export growth.
In the first three quarters of 2018 and particularly in the third quarter, stronger-than-projected GDP growth rates mainly contributed both to the upward revision of the GDP forecast for 2018 and the carry-over effect on the growth rates in 2019, although the future outlook had not improved overall. In the third quarter, robust growth was recorded in several services sectors, and this led to improvements in the development assessment of, for instance, the information and communication services sector. However, not all the factors underpinning growth will be sustainable. The improvements in Latvian port services and transportation services by rail can be viewed as short-lived since they are related to infrastructure repairs in Russia. The real estate and financial services sectors are highly volatile. Uncertainty in the financial sector is determined by changes in the segment of credit institutions providing services to foreign customers that might persist over the year to come depending on the credit institutions' capacity to adjust to market conditions. At the same time, the construction sector development slowed down already in the third quarter, expecting a more subdued-than-before pace of growth in the future. The development of manufacturing and trade has moderated significantly and will be adversely affected by the weakening of the global environment also in the future.
Latvijas Banka has revised its GDP growth forecast for 2018 upwards to 4.9% according to seasonally and calendar adjusted data (3.9% in June) and to 4.7% according to non-adjusted data (3.9% in June). The GDP growth forecast for 2019 has been revised upwards to 3.5% (3.0% in June) and to 3.6% (3.0% in June) respectively. In line with Latvijas Banka's expectations, in 2020 GDP growth will amount to 3.1% according to seasonally and calendar adjusted data and to 3.5% according to non-adjusted data.
Annual changes in GDP
(at constant prices; seasonally and calendar non-adjusted data; 2018-2020 Latvijas Banka forecast; %)
Although the GDP forecast has been revised upwards and the inflationary effect of domestic demand is gradually becoming more pronounced, this increase has been lower than expected. Therefore, Latvijas Banka's inflation forecast for 2018 has been revised downwards from 2.9% in June to 2.6%. The inflation forecast for 2019 has remained unchanged (2.9%). The inflationary effect of domestic demand is expected to continue on a gradual upward trend, thus reflecting sustainable income convergence and the fact that the economy is operating slightly above its potential. With concerns about excessive oil supply reviving in the oil market and the oil price having lost almost one third of its value since the middle of October, the current oil price forecast is slightly lower than the June forecast. However, the energy component of inflation will be pushed up by higher electricity prices at the beginning of 2019, reflecting electricity price hikes at the Nord Pool Spot Exchange due to the hot and dry summer. The process of income convergence will determine that inflation is most likely to exceed the euro area average also in the years to come. Latvijas Banka's inflation forecast for 2020 for Latvia is 2.5%.
HICP annual change
(2018-2020 Latvijas Banka forecast; %)
Forecasts of macroeconomic indicators (%)