On macroeconomic forecasts by Latvijas Banka
Latvijas Banka has revised its GDP growth forecast for 2019 downwards from 2.9% to 2.5%. Latvijas Banka has also revised its economic growth forecast for 2020: Latvian economy is expected to grow by 2.6% (down from the previous forecast of 3.1%). Latvijas Banka's inflation forecasts for this and next years remain unchanged at 2.9% and 2.5% respectively.
With the global and euro area economies slowing down, Latvia's growth is also gradually decelerating. On account of weaker demand in Latvia's major trade partners, exports are declining, investment is on a downward path, and the main role in maintaining GDP growth is played by the domestic consumption which has slightly decreased in the last few months.
Looking deeper into export trends, one can observe slowdown in the major exporting sector, i.e. manufacturing. The output of the wood processing sector is shrinking on account of several factors; one of the key ones is a drop in external demand, particularly in Scandinavian countries and also in the UK due to Brexit.
The positive trends of the domestic demand are reflected in the services sector, such as professional services, entertainment and recreation services and the hospitality and catering services.
At the same time, it is increasingly obvious that Latvia's business cycle is past its peak and the economic growth is gradually starting to decelerate. Moreover, the slowdown is becoming more pronounced: it was just in December when Latvijas Banka's forecast of Latvia's GDP growth was 3.5% for 2019; in June it was revised downwards to 2.9%, mostly on account of external factors; now Latvijas Banka's current assessment suggests that the economic growth will be 2.5% (seasonally adjusted data) this year.
Latvijas Banka's GDP growth forecast for 2019
Latvijas Banka has also revised its economic growth forecast for 2020: Latvian economy is expected to grow by 2.6% (seasonally adjusted data; down from the previous forecast of 3.1%). This is the baseline scenario; however, given the prevailing global uncertainty, we should be ready for diverse development scenarios.
Latvijas Banka's GDP growth forecast for 2020
Latvia's inflation is hovering around 3%, which is adequate in the light of the current economic situation and gradual income convergence of households in Latvia with the levels seen in other euro area countries. At this point slower economic growth has not been translated in inflation yet: underlying inflation, lagging behind the business cycle, still continues to show a gradual growth trend. With a high annual rate of increase in remuneration persisting, the services price inflation, being the most responsive to changes in the domestic labour costs, exceeds 3%.
Latvijas Banka expects, however, that, with the slowdown of the economic activity, inflation will also gradually decrease. A decline in inflation will also be supported by the price dynamics of global food commodities (wheat, milk) where a downward trend has been observed over the last few months. Oil price dynamics has demonstrated pronounced uncertainty as the effect of the global demand weakening is offset by supply shocks, e.g. the recent attack on Saudi Arabia's oil processing infrastructure.
In view of this set of factors, Latvijas Banka's inflation forecasts for this and next years remain unchanged at 2.9% and 2.5% respectively.