On Monday, the European Commission (EC) published the latest economic growth forecasts for the European Union (EU), stating that the Latvian economy is expected to grow by 1.4% in 2023, which is by 1.3 percentage points steeper growth than the EC had predicted in February this year. The improved forecast is due to stronger than expected growth in private consumption in the second half of last year and in the first months of this year, aided by favourable weather conditions and State support for households to compensate for the increase in energy resource prices, as well as a slightly more favourable situation in Latvia's external markets, primarily in the eurozone, where economic growth will reach 1% instead of the previously forecast 0.9%.
According to the EC, Latvia's economic growth is still expected to be slower at the start of 2023, adversely affected by high inflation, reduced household spending, as well as delays in the implementation of EU Funds investment projects. However, slowing inflation in the second half of this year is set to provide relief to households’ purchasing power, thus lending a boost to consumption growth. Additionally, the implementation of the EU-funded projects, including those financed by the Recovery and Resilience Facility, are projected to pick up in the second half of 2023. Export growth is expected to slow down due to weakening foreign demand, nonetheless it is set to be higher than the overall economic growth, reaching 2.4%.
Economic growth forecast for 2023 for Latvia is the highest among the Baltic states, and Lithuania's economy according to the EC is expected to grow by 0.5%, while Estonia is expected to see a 0.4% recession. A significant difference is the forecast in the growth of private consumption, reaching 3.0% in Latvia, as compared to 0.3% growth for Estonia and 0.1% growth for Lithuania.
In 2024, according to the EC forecasts, growth is projected to pick up to 2.8%. A significant drop in inflation is set to foster private consumption. A further increase in EU-funded investments and a decline in prices of construction materials are expected to boost investment. Thus, investment growth in 2024 will be 4.0%. Export growth is projected to pick up as the inflation slowdown elsewhere in the EU boosts foreign demand, thus export growth is likely to reach 2.5%.
As regards the price rise, the EC points out that energy price inflation is set to turn negative and other price components, except services, to slow considerably. Overall, inflation in 2023 is forecast at 9.3%, with core inflation only slightly higher. By 2024, inflation is expected to slow down to 1.7%, but core inflation is projected to remain above 2% as price growth of services is expected to accelerate.
In assessing the economic situation in Europe, the EC states that the EU economy has successfully overcome the shocks caused by the pandemic and Russia's aggression in Ukraine. The EC has made slight upward revisions for growth in both the EU and the euro area, projecting the EU economy to grow by 1% this year and by 1.7% next year, with the gross domestic product (GDP) growth in the euro area being expected at 1.1% and 1.6% respectively. Inflation starts to decline amid the deceleration of energy prices; but, nonetheless, high core inflation is a concern. The EC has raised the inflation forecast for the euro area for this year by 0.2 percentage points, projecting a price rise of 5.8%, while the inflation forecast for 2024 has been raised by 0.3 percentage points to 2.8%, and the EC notes that the progressive firming of core inflation has set the monetary authorities on a path of more forceful monetary tightening to stop inflation pressure.
The EC is currently more optimistic about the economic growth outlook of Latvia, as compared to the forecasts developed by the Ministry of Finance (MoF) in February this year, and such change is determined by the stronger growth of Latvia's economy and private consumption in recent months, as well as the better economic situation in the euro area. The FM is going to update the forecasts of macroeconomic indicators in the middle of June this year, using these forecasts as the basis for developing the draft state budget law for 2024.