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Ceturtdiena 02.04.2020 | Name days: Imgarde, Irmgarde
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FDP: economic growth may be slowed by multiple global and domestic risks

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FDP, economic growth, global risks, GDP, freightsLatvia’s Fiscal Discipline Council (FDP) agree on Finance Ministry’s analysis, expecting the strong effect from slowed economic growth to remain in 2020, the council says.

The council points attention towards multiple global and domestic risks that may slow economic growth in the coming years, especially 2021 and 2022.

According to FDP, for the second consecutive year winter in Latvia has been warmer than usual. This affects the heating energy market and forestry sector. It is expected this factor will retain a negative influence over Latvia’s economic growth in the coming years.

In regards to the 2022 budget FDP believes the volume of public investments may decline because the financing from EU funds will start to decline as well.

This means construction company may decide to wait and consider signals on the beginning of the next EU funding cycle, FDP notes.

One such risk mentioned by the council is the decline of freight industry, which began in 2019 and may yet continue in 2020-2022, especially in the port segment. This can be explained with cargo carriers having performed investments, reorienting freights to other ports, which creates other unpleasant costs from losing freights.

There is very low lending activity observed in Latvia’s banking sector. Aside from that, it is difficult for non-residents to open accounts, the council mentions. Further banking sector’s consolidation is expected. Because of this, the banking sector’s growth may become slower.

Read also: Tax burden in Latvia proposed to be increased from 31.4% to 35% of GDP

The council also points towards the rising risk of coronavirus epidemic, which has already had an effect on global economic operations in 2020. There are also risks left from previous years, including the uncertainty on relations between China and trade partners, including EU and USA, as well as the outcome of Brexit.

According to the council, the Finance Ministry’s real GDP outlook for 2020 is conservative and this largely meets European Commission’s estimates. At the same time, this is 0.4 percentage points below that of the Bank of Latvia and 0.6 percentage points below that of the International Monetary Fund. Inflation level outlook for 2020 is conservative and coincides with EC’s outlooks. In addition, the increase of average gross wages in 2020-2023 is predicted to be slower than the one observed in previous years. Nevertheless, the increase is considered stable, which, at a low inflation level, would stimulate private consumption.

Finance Ministry’s developed macroeconomic outlooks will be used as the bedrock for Latvia’s Stability Programme 2020-2023, which is planned to be submitted to the Cabinet of Ministers in April 2020.

The council is an independent collegial institution that was created in order to ensure compliance with fiscal discipline requirements.


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