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Latvia’s Fiscal Discipline Council predicts slight drop for country’s economy

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUFiscal Discipline Council (FDC) expects Latvia’s economy to drop slightly in the coming years. For 2020, the expected drop is -0.2 percentage points and -0.1 percentage points in 2021 and 2022. GDP growth rate for 2019 has not been changed.

Finance Ministry’s outlook is considered realistic. Nevertheless, there are concerns in relation to low tax revenue and the still tense situation on the labour market, which could potentially affect inflation growth. The council believes the drop in external demand and insufficient dynamic for investments may slow GDP growth.

Economic growth outlook was affected by domestic and external factors. FDC notes that some of the most notable external factors include reduced growth outlook in EU and Eurozone in 2019 and 2020, as well as slower growth of Latvia’s exports. Domestic factors include smaller centralized heating supply consumption and reduced energy output from hydro-electric power plants in Q1 2019.

It is also expected for construction and investment growth to become slower and no longer contribute as much as in the previous two years, the council predicts.

«Latvia’s labour market continues heating up – unemployment is in decline, residents’ welfare level on the labour market reaches 70% and Latvia’s market saturation continues increasing. Thus it is expected for pressure on labour pay and inflation to increase, which could increase inflation indexes in a long-term perspective,» FSC member Inna Šteinbuka predicts.

FDC member Ülo Kaasik mentioned the much slower product and import tax revenue growth (+1.3%) when compared to rapidly growing wage rates (+8%), as well as the rapidly growing surplus and mixed gross income (+7.1%). In its previous reports, the council stressed risks associated with the tax reform, which could negatively impact state revenue and ability to finance new priorities at the expense of economic growth. Šteinbuka believes additional risks are also associated with the excise tax war with Estonia.

FDC predicts economic growth in 2020-2022 will come close to growth potential after the rapid growth of 2017 and 2018 even though Finance Ministry’s outlook is more optimistic than that of European Commission.


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