Economic growth will recover faster in the second half of the year - Ministry of Finance

RIGA - Growth of the Latvian economy will resume faster in the second half of the year, the Ministry of Finance (MoF) told LETA.

The ministry acknowledged that economic development will continue to be negatively affected by the spread of Covid-19 until mid-2021, but after that, with the removal of most restrictions, growth will begin to recover rapidly.

Such a scenario is envisaged by macroeconomic forecasts developed at the beginning of February, which are based on the Covid-19 vaccination plan approved by the government, and assuming that 70 percent of the Latvian population will be vaccinated by the end of summer and there not be another wave in the autumn.

"Due to the prevalence of Covid-19, the prevailing uncertainty is the main reason why, compared to the macroeconomic forecasts developed in June 2020, the gross domestic product (GDP) growth forecast for 2021 has been reduced by 2.1 percentage points to 3 percent, as at the beginning of summer Covid-19 looked set to retreat. Assuming a successful fight against Covid-19, GDP growth in 2022 is projected to be 1.4 percentage points higher than in June last year. Economic growth is projected to be close to potential in the next two years," the ministry said.

According to the Ministry of Finance, economic growth in 2021 will be ensured both by the recovery of private consumption growth by 4 percent, with the removal of most restrictions in the second half of the year, and by investment growth and export growth by 4.1 percent and 4.3 percent, respectively, while public consumption growth will remain at last year's level and will amount to 2.4 percent. Further acceleration of economic growth in 2022 will be ensured by both a full recovery of private consumption and a rapid increase in investment, including a significant increase in investment through European Union funds.

The Ministry of Finance forecasted that unemployment rates would follow economic activity with a slight lag, rising to 8.3 percent this year after a rather modest increase in 2020, but in 2022, as the number of employed population grows, unemployment will fall again to 7.1 percent of the economically active population.

Inflation dynamics, on the other hand, are more pronounced. The Ministry of Finance forecasts the average annual inflation for 2021 at the level of 1.4 percent, increasing from 0.2 percent last year. Also in 2022, inflation will continue to rise, reaching 2 percent and stabilizing at this level throughout the period until 2024.

According to the forecasts of the European Commission and the Organization for Economic Co-peration and Development (OECD, a faster rise in consumer prices this year will be determined by global economic recovery, including oil and food prices in world markets, as well as internal factors - wage growth and consumer recovery.

In developing macroeconomic forecasts, the ministry bases these on conservative assumptions, assessing potential economic development risks in consultation with experts from the International Monetary Fund, the European Commission, the Bank of Latvia and the Ministry of Economics, so that unfounded optimism does not adversely affect public finance stability.

"However, risks remain, mainly related to the spread of Covid-19 and the course of vaccination, including possible disruptions in vaccine supply, disorderly logistics and inactivity of the population, and new viral mutations. There are also risks to the construction industry  as well as the risks of weaker recovery for companies following the lifting of Covid-19 restrictions, including possible bankruptcies and the growth of the shadow economy, all of which could lead to deviations from baseline assumptions," said the Ministry of Finance.