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Today after a presentation of a report on the situation in the Latvian and global economy, the Council of Latvijas Banka decided to revise downwards the GDP and inflation forecasts for 2016.

Latvia's economic growth remained moderate in 2015: according to seasonally and calendar adjusted data, GDP increased by 2.6%. The fourth quarter of 2015 saw a notable slowdown in the economic growth implying high uncertainty and risks on account of external factors.

With the purchasing power of the employed continuing on an upward trend, in 2016, like in recent years, Latvia's economic growth will be mostly driven by private consumption. The external environment conditions remain complicated, as confirmed by the weak export data of Latvian goods in January.

Looking by sector, construction and transportation in 2016, like last year, will be the major sectors dampening the GDP growth. In 2016 the contribution of manufacturing to GDP growth will be considerably weaker than in 2015. The negative January data also raise concerns regarding the development of manufacturing.

In view of the persistently tense geopolitical situation, worsening of the global economic growth forecasts and those of a part of the trade partners, and the weak investment dynamics, Latvijas Banka's GDP forecast for 2016 has been revised downwards from 2.7% to 2.3% (according to seasonally and calendar adjusted data).

Average annual inflation for 2016 will remain low on account of supply-side factors. Latvijas Banka's inflation forecast for 2016 has been reduced to 0.0% (the forecast of September 2015 being 1.3%).

The forecast of the average annual inflation for 2016 is slightly lower than in 2015. Although moderate economic growth is expected to persist, it has slowed down and a rise in wages and salaries is not projected to be as strong as in previous years. Consequently, the demand side pressure on inflation will not strengthen.

It is highly unlikely that the rapid fall in energy and food prices seen in the global market in 2015 will be experienced again in 2016 as the base for these prices is quite low. Nevertheless, in early 2016 the above prices still continued on a downward trend, affecting costs in many sectors with a slight lag and finding more direct reflection in fuel, natural gas and heating prices, but indirect impact could be felt in prices of some tradable goods and services as well.

Inflation will be slightly driven up by changes in indirect taxes directly affecting the prices of goods and services: an increase in excise tax rate for fuel from January and alcoholic beverages from April, and the application of the standard VAT rate to the housing maintenance fees from July.

Risks to the forecast of the average annual inflation for 2016 are on the downside as the slowdown of the global economic growth prevents the demand for resources (including energy) to expand; consequently, the oil price is likely to be lower than projected before.

For further information on the new forecasts see the Forecasts of Latvijas Banka section of Latvijas Banka's website at https://www.macroeconomics.lv/.