In 2017, GDP growth was very strong and higher than projected. According to Latvijas Banka's forecasts, robust growth will continue also in the future; however, such a high level of annual GDP growth is unlikely to persist.
Private consumption will remain strong on account of declining unemployment, an increase in real income and the high consumer confidence. EU fund inflows will continue and increase in 2018, supporting prospects of a notable positive contribution of the construction sector to growth in the next few years. As a result of a persistently strong domestic and external demand, high production capacity utilisation and low interest rates, private investment is also expected to continue supporting economic growth. At the same time it should be noted that only a modest recovery in lending has been projected. Moreover, the accelerated rate of investment growth in 2017 resulted from both the low base of 2016 and some one-off events, e.g. the purchase of planes.
Despite the robust external demand, its rate of increase in the next few years will be slower than in 2017 and contribution of exports to economic growth is likely to decline. Manufacturing, closely related to exports, will also continue on an upward trend, but the growth will become less pronounced.
In September 2017, Latvijas Banka revised upwards its GDP forecast published in June. Consequently, part of the factors, e.g. solid external demand, the effect of higher minimum wage and other legislative act amendments on private consumption, and stronger growth in some sectors, that had pointed to a required upward revision of the forecast since publishing the previous issue of the Macroeconomic Developments Report, have already been included in the September forecast.
However, positive sectoral preliminary statistical data and the GDP flash estimate for the third quarter of 2017 allow for a further upward revision of the GDP forecast. According to data not adjusted for seasonal and calendar effects, in 2017 GDP growth is likely to stand at 4.7% (4.2% in September), while in seasonally and calendar adjusted terms it is likely to be 5.2% and 4.7% respectively. Further GDP growth of 4.1% is projected in 2018 (3.8% in September) in both seasonally and calendar adjusted and non-adjusted terms. Although the GDP forecast has been revised upwards, it is mostly based on the observed growth data, while the outlook on future development and factors behind it has remained broadly unchanged. In 2019, the pace of the economic growth is projected to remain sustained, albeit not so rapid as before: 3.2% according to data adjusted and not adjusted for seasonal and calendar effects.
In 2017, inflation developed along the expected path, therefore Latvijas Banka's inflation forecast for 2017 remains unchanged at 2.9%. In 2018, inflation is also likely to stand at 2.9%. The change in the inflation forecast from the one published in the June issue of the Macroeconomic Developments Report to that released in September, i.e. 0.8 percentage point, to 2.8%, was mostly driven by the information on a steep rise in the excise tax and a substantial increase in the minimum wage. The change in the inflation forecast in the period from September to December, i.e. 0.1 percentage point, to 2.9%, mainly resulted from a stronger-than-expected domestic demand and a further rise in oil prices. Core inflation in 2018 will be higher than in 2017 on account of a hike in labour costs. In 2018, service prices are projected to rise by more than 3% on average, reflecting robust domestic demand and a sustained pick-up in labour costs that will persist on the back of the cyclical unemployment component remaining negative. Moreover, if the level of oil prices stabilises above 60 US dollars per barrel, inflation may slightly exceed the forecast. In 2019, inflation is projected to be 2.6%.
ANNUAL CHANGE IN GDP
(at constant prices; seasonally and calendar non-adjusted data; 2017–2019 Latvijas Banka forecast; %)
HICP ANNUAL CHANGE
(2017–2018 Latvijas Banka forecast; %)