Latvia country note: OECD Economic Outlook, May 2021

 97

Latvia Output in the Latvian economy is projected to increase by 3.2% in 2021 and 5.6% in 2022. Private consumption will rebound starting from the second half of 2021, fuelled by pent-up demand and by rising consumer confidence. Exports have been resilient and will remain strong. Investment will rise due to improving economic sentiment and sizeable EU funds. Inflation may increase temporarily as a result of higher food and energy prices and the increase in minimum wages. Still, core inflation should remain subdued, gradually increasing towards 2%. The lagging vaccine rollout risks delaying the recovery.

Fiscal support has helped to avoid a more severe downturn and should remain in place, although with more targeting towards the most vulnerable and affected households and firms, until the recovery is well underway. More spending on adult training, particularly in terms of digital skills, could help to lower joblessness faster by reducing skills mismatches and boost potential growth.

The vaccine rollout is lagging The number of confirmed COVID-19 cases decreased gradually from mid-January 2021 but remained high and started to rise again in April. The stringency of policy responses has changed little since November 2020. Public recreation facilities are closed; restaurants can only provide takeaway services and anybody arriving from abroad must self-isolate for ten days. While all kindergartens remain open, elementary schools in municipalities with high infection rates are closed. Only 20% of the population had received at least one vaccine dose by mid-May.

Latvia The vaccine rollout is lagging

The recovery will accelerate in the second half of 2021

Daily COVID-19 vaccine doses administered

Real GDP

7-day m.a. per 100 50

40

Index 2019Q4 = 100, s.a 112

Latvia

Current growth path

Estonia

Pre-crisis growth path¹

108

Lithuania OECD

104 30 100 20 96 10

0 Jan-21

92

Mar-21

May-21

0

0

2020

2021

2022

88

1. The pre-crisis growth path is based on the November 2019 OECD Economic Outlook projection, with linear extrapolation for 2022 based on trend growth in 2021.

Source: OECD Economic Outlook 106 and 109 databases; and OECD calculations based on Our World in Data.

StatLink 2 https://stat.link/yg3aou

OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 2021

98 

Latvia: Demand, output and prices 2017

2018

GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Harmonised index of consumer prices Harmonised index of core inflation2 Unemployment rate (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

2020

2021

2022

Percentage changes, volume (2015 prices)

Current prices EUR billion

Latvia

2019

27.0 16.3 4.9 5.6 26.7 0.4 27.1 16.6 16.8 - 0.2

4.0 2.6 1.6 11.8 4.3 1.6 5.5 4.3 6.4 -1.4

2.0 2.2 2.6 2.1 2.2 0.6 2.6 2.1 3.0 -0.5

-3.6 -10.0 2.6 0.2 -5.4 1.6 -3.9 -2.7 -3.3 0.4

3.2 1.3 3.7 3.6 2.3 0.7 3.0 6.5 6.2 0.3

5.6 8.6 2.2 6.2 6.8 0.0 6.8 3.8 5.6 -1.0

_ _ _ _ _ _ _ _ _

3.9 2.6 1.9 7.4 -1.3 -0.8 46.3 37.1 -0.3

2.3 2.7 2.2 6.3 -3.0 -0.6 47.8 37.0 -0.7

0.1 0.1 0.9 8.1 11.5 -4.5 55.6 43.5 3.0

1.6 1.2 1.3 8.4 10.7 -7.0 60.4 48.3 2.4

2.2 1.7 1.7 7.1 -1.1 -2.2 60.9 48.9 1.0

1. Contributions to changes in real GDP, actual amount in the first column.

2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.

Source: OECD Economic Outlook 109 database.

StatLink 2 https://stat.link/sqd1y6

Exports of goods have been resilient Latvia’s GDP contracted by 2.6% in the first quarter of 2021 compared with the previous quarter.

Restrictions on activity caused a steep fall in credit card spending and cash withdrawals at the beginning of 2021, but spending returned to summer 2020 levels by April. Google data indicate that mobility to places like restaurants and shopping centres was about 16% below pre-pandemic levels in mid-May, while midweek traffic congestion in Riga was about 14% lower than in 2019. Meanwhile, goods exports have been resilient and, in March 2021, were 21% higher than a year ago. Despite the jump in unemployment, wages continue to grow, driven by high-skill sectors such as ICT, professional services, and science and technical activities. The newly unemployed are mainly young adults from Riga. In 2020, firms operating in restricted sectors – such as hotels, restaurants and transportation – experienced average losses (negative after-tax earnings) relative to turnover of about 4 percentage points.

Fiscal policy is mitigating the economic impacts of the pandemic Since the beginning of the second wave, the government has expanded support to firms’ cash flow, the health system and the unemployed. One-off allowances were paid in March and April 2021 to pensioners, disabled people and parents, amounting to 0.9% of GDP. Support measures should amount to 4¼ per cent of GDP in 2021, compared with about 3% of GDP in 2020. However, most of the income support schemes, including the furlough scheme, are scheduled to end in the second half of 2021. The debt repayment moratorium and most bank support measures expired at the end of 2020. The minimum wage was increased by about 16% in January 2021, and the salaries of medical professionals and teachers in OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 2021

 99 the public sector were increased as well. In 2022, public investment is projected to increase by about 1½ per cent of GDP thanks to EU-funded projects. Accommodative ECB monetary policy continues to mitigate the recession through low borrowing costs.

A strong recovery should get underway in the second half of 2021 Private consumption will rebound sharply once restrictions are gradually lifted in the second half of 2021, supported by earlier government transfers to households, rapid wage increases and lower household saving out of current disposable income. GDP should recover to its pre-crisis level during the latter half of 2021. Strong public investment in 2022 will sustain the economic recovery. Exports of goods will remain robust, while exports of services will recover as economic activity increases in Europe. Unemployment will ease gradually but remain above its pre-crisis level as the labour market adjusts to changes in demand.

Nevertheless, uncertainty remains high. Further delays in the vaccine rollout would constrain private consumption and investment. Inflation could rise due to supply-chain disruptions and a rapid increase in demand for skilled employees, especially in the buoyant construction sector. On the upside, a swifter use of EU funds could lead to a stronger rebound.

Adult training would support post-crisis reallocation and future productivity growth To build a strong recovery, policy should focus on upskilling to address skills mismatches. Stepping up job-search support would help the unemployed transition to new jobs. Training, particularly in terms of digital skills, would facilitate the adoption of new productivity-boosting technologies. To ensure an inclusive recovery and bolster the social safety net while encouraging more environmentally sustainable growth, spending on healthcare and minimum income schemes could be further increased, financed by higher property and environmental taxes.

OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 2021