On macroeconomic forecasts by Latvijas Banka
Latvia's economy has grown at a more rapid pace than in other euro area countries this year. The results posted by the third quarter were unexpectedly positive. In Latvia, like elsewhere in the euro area, they were affected by both one-off factors and overall economic progress, and the third quarter saw very buoyant growth also in Latvia.
The main driving force is private consumption dynamics as well as investment. This trend will remain unchanged in the future. Growth will be rapid although its pace will decelerate somewhat. Risks, like in the euro area, remain balanced, but growing uncertainty slightly reduces future development trends.
It was the services sectors that ensured the fast growth in the third quarter. For example, the information and communication technologies sector continued to grow very rapidly, expansion of the transport sector was driven mainly by one-off factors, i.e. the turnover at ports and in rail transport increased due to infrastructure repairs in Russia. Development in the real estate and financial services sector fluctuated and this situation will persist for some time. The financial sector has been subject to significant changes, and growth indicators will reflect a search for business models by some banks. Development of several sectors, i.e. construction, manufacturing and trade has slowed down.
In comparison with the June forecast, Latvijas Banka's GDP growth forecast for 2018 has been revised upwards from 3.9% to 4.9% in adjusted terms and from 3.9% to 4.7% in non-adjusted terms. GDP growth forecast for 2019 has been revised upwards from 3.0% to 3.5% in adjusted terms and from 3.0% to 3.6% in non-adjusted terms. According to our expectations, in 2020 GDP growth will amount to 3.1% in adjusted terms and to 3.5% in non-adjusted terms. Private consumption, investment and, to a lesser extent, exports will remain the drivers of growth, yet the latter is already decelerating significantly.
Inflation rate reflects sustainable income convergence. We are happy that the wages are rising steadily, yet this can be beneficial to the economy only if the rise is matched by productivity growth. At the moment, productivity is slightly lagging behind. We do not seen any signs of overheating, like the ones observed before the crisis, at the current stage of development. The rising income is also reflecting the upswing of the cycle, so the annual inflation has been hovering around 3% most recently. The path of core inflation is more stable, and the relationship between the pressure from wages and costs and transmission to prices has weakened. This is characteristic of the euro area as a whole and also of Latvia in particular. One of the most recent factors contributing to inflation is oil price developments.
In comparison with the previous forecast, inflation forecast for 2018 has been revised downwards from 2.9% to 2.6%, the forecast for 2019 remains unchanged at 2.9%, reflecting the cost pressure on prices, whereas that for 2020 is set at 2.5%.
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