Ministry of Finance updates macroeconomic forecasts

LATVIA – Finance

As the schedule for the preparation of the state budget for 2023 has changed, the Ministry of Finance has updated the forecasts of macroeconomic indicators for the years 2022-2025. Taking into account the Latvian Gross Domestic Product (GDP) dynamics in the third quarter as well as forecasted slowdown of economic growth in Latvia’s main foreign trade partners, the GDP growth forecast for 2022 has been reduced to 1.6%, while in 2023 GDP is forecast to drop by 0.6%.

Ministry of Finance updates macroeconomic forecasts

Compared to the forecasts made in August, the updated macroeconomic scenario has also slightly increased the inflation forecast for 2022 and 2023. According to the updated projections, consumer price growth will reach 17.3% in 2022 but will fall to 8.5% in 2023, 0.8 and 2.0 percentage points higher respectively than projected at the beginning of August. Inflationary pressures will decrease over the next two years and stabilise at 2.0% by 2025.

On the labour market, due to the negative impact of the war in Ukraine, trade restrictions and skyrocketing prices, it has hardly been felt so far, but may manifest itself with a longer time lag than previously forecast. Consequently, the unemployment rate forecast for 2022 has been lowered to 7.0%, or 0.1 percentage point, while the unemployment rate could rise to 7.3% in 2023, 0.2 percentage points higher than the August forecast. Unemployment is expected to fall to 7.0% in 2024, but this would be 0.3 percentage points higher than forecast at the start of August.

The wage growth forecast for 2022 is unchanged, but increased to 7.5% and 6.2% for 2023 and 2024 respectively, taking into account the increase of the minimum monthly wage to €620 and €700 from 2023 and 2024 respectively as of 1 January. Compared to forecasts from the beginning of August, the average wage forecast for 2023 has increased by 1.5 percentage points and the 2024 forecast by 0.9 percentage points.

In refining the macroeconomic forecasts, the Ministry of Finance maintained the assumption that the geopolitical situation will not deteriorate significantly and no further escalation of hostilities is foreseen, nor is such a severe outbreak of Covid-19 expected that new restrictions would be required.

However, the Ministry of Finance has also assessed the external and internal environment risks and points out that the forecasts are still being developed under extremely high uncertainty. Still the most significant negative risks are related to the geopolitical environment as well as rapid energy price fluctuations and limited availability of energy resources, which could have a more negative impact on economic growth.

In developing the macroeconomic forecasts, the MoF consulted experts from commercial banks, the updated forecasts were agreed with the Bank of Latvia and the Ministry of Economics, and approved by the Council for Fiscal Discipline on 2 December.

The FM’s full macroeconomic forecast and the latest macroeconomic and budget overview can be found on the FM’s website: www.fm.gov.lv

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