Following the beginning of preparations for the 2017 state budget project, Finance Ministry has actualized macro-economic indexes outlook for 2016-2019. According to the new outlook, Latvia’s economy is expected to rise 2.5% in 2016 and 3.5% in 2017.
Compared with previous outlooks that were used as a base for Latvia’s Stability programme 2016-2019, GDP growth outlook for 2016 has been reduced by 0.5 percentage points. Economic growth will be slower in 2016 in comparison with 2015. In 2017, economic growth will become more rapid, as reported by Finance Minister.
The situation on external markets has improved not as well as previously expected. Slower activity in terms of investments means economic growth will reduce slightly for the beginning of 2016. Private consumption will remain the main driving force behind growth. It will be enhanced by wage and employment growth. Following restoration of realization of funding from European Fund in the second half of the year, economic growth rate will become faster in multiple foreign trade partner countries. It will ensure more balanced economic growth and more rapid GDP growth rates in 2017.
Thanks to the decline of prices on oil and other raw materials on the global market, prices on energy resources and food products also declined in Latvia. Inflation remains low – 0.0%. Price rise is expected to become more rapid in 2017, reaching 1.6%.
Along with low inflation, powerful rise of pay will continue in Latvia in 2016. It will form 5.5%, but will be slightly lower in comparison with previous years, when actual pay rise exceeded 6%. Average gross wages, according to Finance Ministry’s estimates, will reach EUR 863 and EUR 910 in 2017.
Negative risks are largely related to the possible worsening of the geopolitical situation and low global economic growth, including the possibility of Brexit. Internal risks include the low investments level and unbalanced pay rise.
It should be added that the Fiscal Discipline Council has approved Finance Ministry’s macroeconomic predictions that will be used for Latvia’s medium-term budget contents for 2017-2019. To support government’s work on the development of budget-related documents – stability programme and medium-term budget contents. An agreement was reached in February in relation to FM macroeconomic outlook.
«Reviews of Latvia’s growth outlooks will continue. This situation is found not only in Latvia; the majority of countries around the world are expected to experience decline of economic growth,» – explains GDP work group manager Martins Kazaks. Generally speaking, the Fiscal Discipline Council does not object to FM’s developed outlook in relation to the development of contents for the next three state budgets. The main risks are tied to FM’s intention to begin rapid use of EU funds in 2017 in hopes of enhancing GDP growth and investments. According to recent experience, however, shows that finances provided by EU funds have a tendency to enter the economy closer to the end of the planning period, which is expected to be around 2018-2022.
Downward correction of GDP growth potential will definitely create problems for the development of the state budget for 2017. The new economic assessment does seem more realistic now in comparison with predictions that were voiced a couple of months ago. The new view shows a complicated economic environment and the necessity to accomplish strengthening of the economic growth potential, the council notes.