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Updated: 31.01.2020

The outlook on economic growth in 2019 and 2020 has remained broadly unchanged. However, in view of the changes in the GDP data time series as a result of the benchmark revision to the national accounts made by the CSB, GDP growth is likely to stand at 2.3% in 2019 falling behind the September projections (2.5%). Meanwhile, the forecast for 2020 has remained unchanged at 2.6%. It should be noted that, with the global and euro area economic growth decelerating and high uncertainty persisting in the external economic environment, in September Latvijas Banka already revised downwards its June growth projections for 2019 and 2020 (2.9% and 3.1% respectively).

Although overall the GDP assessment changed only slightly, the expenditure structure projections were revised taking account of the GDP data revision and based on the latest data. The expansion of domestic demand is now projected to be more moderate than previously estimated, with investment growth expected to be particularly weak. In the first half of 2019, export growth improved on account of the data revision. Furthermore, in the third quarter exports expanded more rapidly due to a short-term factor, i.e. a record-high grain harvest. However, with uncertainty persisting and the economic sentiment indicators in the euro area reporting no significant improvement, growth forecasts for 2020 in several trade partners are more pessimistic, also hindering a faster recovery in Latvia's external demand growth in 2020. The weakening of domestic and external demand is projected to be largely offset by a decline in imports, those of investment goods and intermediate goods required for the production of export goods in particular.

Chart 1 ANNUAL CHANGE IN GDP
(at constant prices; seasonally and calendar adjusted data; 2019 and 2020: Latvijas Banka forecast; %)

Annual change in GDP

By sector, some positive medium-term impact might be created by the planned investments in the development of the transport infrastructure, i.e. the airport, as well as a successful operation of the regional natural gas market. This might allow better use of the storage and transmission infrastructure as well as facilitate an increase in the turnover of Latvian businesses trading in natural gas. Stronger growth momentum might also be expected in the construction sector where the level of value added achieved so far has been revised downwards; meanwhile, the construction works of large infrastructure objects are expected to be implemented as planned. At the same time, however, uncertainty surrounding the implementation of individual projects, e.g. Rail Baltica, remains. The performance of the manufacturing and financial services sectors might be weaker than previously estimated: the development of the manufacturing sector has been discouraged by the ongoing negative impact of low prices on the wood industry, as well as the financial services sector has recorded a year-on-year decline in profits with businesses facing persistently high competition for customers and searching for better models of operation.

According to the data for the first 11 months of 2019, inflation is expected to stand at 2.8% in 2019 as compared to 2.9%, the forecast included in Latvijas Banka's June 2018 Macroeconomic Developments Report and updated in September. On account of the downward trend in oil prices, the inflation forecast for 2020 has been revised downwards to 2.4% (2.5% in June and September).

Chart 2 HICP ANNUAL CHANGE
(2019 and 2020: Latvijas Banka forecast; %)

HICP annual change

In spring, oil prices rose mostly on account of temporary factors; investors are expecting oil prices to fall in the medium term. Along with a slightly slower rise in labour costs, this will result in a gradual decline in inflation over the medium term. Nevertheless, on account of the income convergence process, inflation in Latvia is most likely to exceed the euro area average also in the years to come.

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