While starting preparation of the state budget for 2023, the Ministry of Finance (MoF) has updated macro-economic indicator forecasts for 2022-2025. Taking into account the strong recovery of economic growth post Covid-19 limitations and only the limited effect of the war during the first half of the year, the economic growth forecast for 2022 has been increased to 2.8%. While in the second half of the year, under the influence of the war, trade restrictions and the rapid price increase, the development of the economy will slow down significantly and will only reach 1.0% in the next year. In the medium term, slow-down of growth is expected again, with the gross domestic product (GDP) reaching 3.4% in 2025.

Minister of Finance Jānis Reirs: ‘The updated forecasts take into account changes to the external environment and the economic development in Latvia. It should be noted that globally, there is still high uncertainty about the future development of the global economy, and in such conditions of uncertainty the situation may change in either direction. Thanks to a higher growth this year and, accordingly, higher tax revenues, the government will provide support to the population to overcome the crisis.’

As compared to the previous forecasts of macro-economic indicators developed at the beginning of March this year, the GDP growth forecast for 2022 has been increased by 0.7 pp, while for 2023 it has been lowered by 1.5 pp. The growth of economy in 2022 will mainly be ensured by the strong rise in the private consumption after last year’s Covid-19 limitations. However, in the second half of the year, under the influence of high prices and reduction of purchasing power, consumption growth will slow down significantly. Also, export growth will have a noticeable positive influence on the economic growth this year, while investment and public consumption growth rates will be lower. Whereas, in the next year, increase of investments will have a greater role in the growth of economy, including the increase of financing from European Union funds, as well as the improvement of the external trade balance, with exports growing stronger than imports.

As compared to forecasts of the Stability Programme of Latvia for 2022-2025, in the updated macro-economic indicator scenario the inflation forecast has been increased substantially both for 2022 and 2023. According to the updated forecasts by the MoF, inflation may reach 16.5% in 2022 and 6.5% in 2023, which is respectively 8.0 and 3.0 pp more than was forecasted in March this year. The increase of the inflation forecasts is related, first, to a substantially stronger rise in the prices of energy resources, especially natural gas and the related heating energy, and, second, to a sharper rise in food product prices and stronger second-tier effects. During the next two years, the inflationary pressure will decrease and will stabilise at 2.0% by 2025.

In the labour market, the adverse effect caused by the war initiated by Russia, trade restrictions and rise in prices was not yet felt during the first half of 2022 and will manifest itself later than was forecasted initially. Accordingly, the unemployment rate forecast for 2022 has been decreased to 7.1% or by 0.5 pp. Unemployment could stay at this level also in 2023, which is 0.4 pp more than was forecasted in March this year.

The remuneration growth forecast for 2022, considering the sharply rising consumer prices, has been increased from 6.0% to 8.0%, with the average monthly gross remuneration reaching EUR 1,379 in total in the year. In 2023, an increase of remuneration by 6.0% is forecasted, which is 0.3 pp more than in the forecasts of the beginning of March this year.

When developing the macro-economic indicator forecasts, the MoF based itself on the presumption that the geopolitical situation does not worsen substantially and no further escalation of the war takes place and that no such strong Covid-19 outbreak is taking place again which would require imposition of new gathering, business and other restrictions adversely affecting the development of the economy. At the same time, the MoF also evaluated external and internal environment risks and indicates that just like in the previous two years, the forecasts have been developed in conditions of very high uncertainty. The main negative risks are related to the geopolitical situation, as well as to the rise in prices and the limited availability of energy resources, which may affect the economic growth more negatively. At the same time, there are also risks of new Covid-19 mutations and outbreaks, as well as risks of possible escalation of local conflicts in several other regions of the world, including in connection with China which is the world’s second largest economy. Risks to the growth of the global economy may also be posed by the interest rate increase cycle initiated by central banks.

When drafting the forecasts of macroeconomic indicators, the MoF has consulted the experts of the International Monetary Fund, the European Commission and commercial banks. The updated forecasts of macroeconomic indicators have been coordinated with the Bank of Latvia and the Ministry of Economics and were approved by the Fiscal Discipline Council on 10 August.

Full forecasts of the macroeconomic indicators developed by the MoF can be consulted on the MoF’s website: