Latvia Economic Forecast

GDP growth nearly halved in Q1 from Q4. Weaker year-on-year activity in the primary and secondary sectors chiefly drove the moderation. Additionally, the external sector likely dampened overall growth further: Merchandise exports growth in the quarter was the slowest since Q2 2020. Turning to the current quarter, our panelists see the economy swinging into contraction. Economic sentiment deteriorated in April, which, coupled with the ECB’s rate hike in May, bodes ill for private spending and investment. In addition, still-elevated producer price inflation should continue to strain industrial output. In politics, on 31 May, Latvia’s Parliament will vote for a new president. The outcome of the elections may result in a new governing coalition, potentially leading to changes in domestic policy.

In April, harmonized inflation fell to a one-year low of 15.0% (March: 17.2%) due to declining transport prices and moderating food inflation. Annual inflation should soften considerably later this year on ebbing domestic demand and tighter monetary policy. That said, it will likely average in double-digit territory over 2023 as a whole, exceeding the ECB’s 2.0% target.