Having begun the preparation of the 2017 budget, Finance Ministry has updated its macroeconomic index outlook for 2016-2019. According to the latest outlook, Latvia’s economy is expected to grow 2.5% this year and 3.5% next year.
Compared to previous estimates, which was the base of Latvia’s Stability programme for 2016-2019, GDP growth estimate for 2016 has been reduced by 0.5 percentage points. This year’s economic growth will be somewhat slower than that of 2015, when GDP increased by 2.7%. In 2017, economic growth is expected to become more rapid. Compared with previous outlooks, GDP growth has been enhanced by 0.2 percentage points, Finance Ministry reports.
The reduction of the outlook for 2016 is associated with the unstable situation in the external environment and the decline of investments, which followed the decline of finances allocated by the European funds.
Short-term economic growth will remain largely based on growth of private consumption. Medium-term growth will become more balanced between external and internal growth. In addition to that, the stabilization of the external environment and the more rapid use of EU funds, Latvia’s economy is expected to experience growth of investments.
Thanks to the decline of prices on oil and other raw materials on the world market, inflation in Latvia will remain low in 2016 – 0.0%. Price rise will become more rapid in 2017, reaching 1.6%. This will be caused by the expected stabilization of prices and growing demand on the domestic market. Under influence of the aforementioned factors, inflation is expected to reach 2.0% in 2018 and 2.5% in 2019.
Following economic growth, it is expected that the situation on the labour market will continue to improve and unemployment will come closer to its natural level. According to Finance Ministry’s predictions, Latvia’s unemployment level will decline from 9.8% in 2016 to 8.4% in 2019. The number of employed people will increase insignificantly after the 0.2% growth of 2016. The average net pay, according to the ministry’s estimates, will reach EUR 863 in 2016. Average pay is also expected to grow by an average of 5.5% annually.
During the development of the outlooks for macroeconomic indexes for the 2017 budget, Finance Ministry evaluated internal and external environment risks. Positive risks are related to a more rapid growth of crediting services in Latvia and more rapid development of investments. Positive risks also include the improvement of the geopolitical situation and more rapid growth in Latvia’s trade partner countries.
Negative risks remain associated with the possibility of the geopolitical situation becoming worse and global economic growth becoming slower. Other risks are related to Brexit. Internal factors include Latvia’s standing low internal investment level, delays with EU funds and unbalanced wage growth.
According to Finance Ministry’s estimates, the indicative fiscal space for the state budget is expected to be EUR -4.9 million for 2017, EUR 67.6 million in 2018 and EUR 215.6 million in 2019.