Updated: 27.04.2021

In 2020, GDP declined less than expected owing to successful containment of the pandemic, monetary and government support, adaptability of consumers and businesses as well as temporary factors unrelated to the pandemic, e.g. exceptional grain harvest and a steep rise in the wood industry output.

In early 2021, GDP is expected to decrease, whereas in 2021 overall GDP growth may reach 3.3%, compared to the December 2020 forecast of 2.8%. Although the state of emergency was extended, the government support provided to overcome the crisis was also increased. With the infection rates declining only moderately, uncertainty remains high, encumbering investment decisions and, together with the adverse impact of the pandemic on employment and income, resulting in more cautious spending behaviour of consumers. At the same time, due to restrictions, many services are still unavailable or cannot be remotely provided to their full potential. Under such conditions, the level of savings will remain high in the first half of 2021.

Assuming that vaccination will proceed in line with the plan, restrictions are expected to be reduced considerably from the second half of 2021, improving both consumption opportunities and consumer and business confidence. The fiscal measures supporting household income and more active spending of the precautionary and forced savings, which was impossible during the pandemic due to restrictions, will drive a rapid recovery of the private consumption. This year, the rapid public consumption growth will be related to the increased fiscal support for softening the crisis impact. Investment decisions will be supported by the improving sentiment of economic agents. Moreover, the financing of the Recovery and Resilience Facility will gradually become available. The expansion of exports of goods and services is projected to be in line with external demand as it recovers gradually. With external and – particularly – domestic demand improving, imports of goods and services will also see significant growth, reflected in a negative foreign trade balance.

The rapid recovery is projected to remain resilient in the second half of the year and to continue in 2022 with 6.5% GDP growth.

GDP forecasts 2021

In the first two months of 2021, the consumer price dynamics remained negative year-on-year. However, February is likely to have been the last of the coming months to record consumer price deflation. The projected inflation for 2021 is 1.8%, higher than the December 2020 projection of 1.1%. The projection was revised upwards mainly due to higher oil and cereal prices. Following a period of deflation during the first two months of 2021, inflation is expected to record robust growth, with the annual inflation reaching 3% in some months. Consumer prices will also be supported by a rise in service prices on account of the pent-up demand and elevated costs. Consumer price inflation is projected to reach 2.2% in 2022. 

HICP forecasts 2021

The short-term risks to the GDP and inflation forecasts are on the downside and mainly hinge on the opportunities to contain the pandemic. If the vaccination does not proceed as planned and there are any delays in containing the spread of the coronavirus, including its mutations, the economic recovery is likely to decelerate and the upward effect of the postponed consumption on service prices could be smaller than estimated. Nevertheless, the medium-term risks are tilted to the upside and a more vigorous rebound in global demand as a result of the ample fiscal stimuli could provide an additional impetus also to Latvia's economic growth. Food prices could grow more than expected due to higher global demand, whereas the prices of industrial goods could increase more as a result of limited supply.