FM maintains GDP growth forecast for 2019 at 3.2%; the next year's forecast is reduced by 0.2 percentage points

 

The Ministry of Finance (MoF) has renewed the forecasts of the macroeconomic indicators for 2019-2022 when starting the preparation of the state budget for 2020. According to the new forecasts, the Latvian economy will grow at 3.2% this year - the same as expected in February this year when preparing the Latvian Stability Program for 2019-2022. In 2020, Latvia's gross domestic product (GDP) will increase by 2.8%, which is 0.2 percentage points less than in previous forecasts.

Although economic growth decelerated sharply in the first quarter of this year, falling from 4.8% of GDP last year to 3.0%, it was driven by a number of one-off factors, including a sharp fall in electricity and gas in the weather and a fall in real terms. property transactions, but stable growth in the rest of the economy. As a result, economic growth in 2019 will remain at a relatively strong 3.2% level, where more moderate growth rates than in the previous two years will be determined by the stabilization of the inflow of EU funds and weakening demand in external markets.

In 2019, with the growth rate of one-digit growth (8.2%) and the growth of exports remaining at a moderate level of 2.9%, private consumption will be the main driver of economic growth, with a 3.4% rise, driven by strong growth in household income. falling unemployment and rising employment. In 2020, economic growth will fall to 2.8%, driven by slower investment growth rates, as well as increased uncertainty in the external environment, and in the period 2020-2022 as a whole, GDP growth rates will have stabilized at 2.8%, which is \ t close to the pace of potential economic growth.

Average annual inflation in 2019 is forecast at 2.8% and in 2020 at 2.5%. Compared to the forecasts of the Latvian Stability Program 2019-2022, the inflation forecast for 2019 has been raised by 0.3 percentage points, mainly faster than forecast due to the increase in electricity and natural gas prices, as well as the lower euro exchange rate, but the inflation forecast for 2020. increased by 0.3 percentage points.

In the first quarter of this year, the monthly average gross wage growth forecast for 2019 has increased by one percentage point to 7.5%, while for 2020 - by 0.5%, the rapid increase in wages, which reached 8.4% last year. percentage points to 6.0%. According to FM forecasts, the average monthly gross wage in 2019 will amount to 1079 euros, but in 2020 it will rise to 1144 euros.

With stable economic growth remaining, the economy is expected to grow by 0.5% to 914,000 this year, while the unemployment rate will drop to 7.0%. In the coming year, the number of employed in the economy will remain stable, but the unemployment rate will continue to fall to 6.6%. Compared to previous FM forecasts, the number of employees and unemployment rate forecasts have not changed.

When developing the forecasts for the macroeconomic indicators for the budget project for 2020, the MoF was based on conservative assumptions, as well as assessed the external and internal environment risks that the economic growth may turn out to be faster or slower than anticipated.

Major downside risks now include global uncertainty: rising protectionist tendencies, US-China trade conflicts, persistent uncertainty about Britain's withdrawal from the European Union, growing instability in regions of geopolitical conflict, while productivity is now considered to be one of the most acute in terms of productivity-based wage growth. In turn, the positive risks are related to the implementation of several large investment projects, the impact of which on the economic growth may prove to be more favorable than initially expected, as well as a more rapid increase of private consumption in Latvia and more favorable development in Latvia's foreign markets.

In developing a medium-term macroeconomic development scenario, the FM has consulted with experts from the International Monetary Fund, the European Commission, and Latvian commercial banks. The updated macroeconomic indicators forecasts have been agreed with the Bank of Latvia and the Ministry of Economics, as well as approved by the Fiscal Discipline Council on 20 June.

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