Latvia Central Bank Statement

Author: IFLR Correspondent | Published: 24 Sep 2019
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The world experienced rapid economic expansion in 2018, yet there were some strong headwinds from US–China trade tensions, Brexit and severe financial market turbulences. Moreover, growth became more heterogeneous across various regions and countries of the world. Global GDP increased by 3.7%, just a fraction less than in 2017 (3.8%). According to the baseline scenario, global economic growth is expected to decelerate slightly in 2019. This will be driven by several factors, including: the threat of protectionism and probability of global trade wars; the rising costs of funding as major central banks gradually unwind their monetary policies; and Brexit. There are indications that the global economic cycle is mature.

The euro area is witnessing an economic slowdown driven by softer external demand and some country and sector-specific factors. Despite highly accommodative financing conditions that continue to support the euro area's economy and rising employment and wages, external risks suggest that economic policymakers should remain vigilant.

Primarily as a result of the Eurosystem's monetary policy, medium-term inflation has approached the inflation target of below, but close to, 2%. Core inflation can be expected to strengthen in the medium term under the impact of accommodative monetary policy measures, economic growth and rising wages.

Latvia's economic growth remained robust in 2018 at roughly 5%, much like in 2017. The role of exports as the key driver of GDP growth has gradually been overtaken by domestic demand and construction, supported by EU funding. Exports have contracted, primarily on account of developments in Latvia's key external markets.

Growth is expected to decelerate in 2019, although it will remain relatively buoyant. Considering global market developments, the slowdown in Latvia's economic growth and the approaching end of the EU funds programme, implementing an economic policy geared towards long-term growth is vital. The government budget should run a surplus, particularly taking account that this low interest rate period cannot last forever and that economic deceleration on a global and national scale is expected.

Latvia saw continued wage increases in 2018 and this trend is likely to persist in 2019. Although rising wages boost domestic consumption and benefit economic growth, the widening wage–productivity gap is a matter of concern since it creates a cost pressure on businesses and has a negative effect on their global competitiveness. Discussions about potential solutions to address labour market problems are gathering strength. People are the key to Latvia's competitiveness and investment in education and innovation to drive productivity has a major role to play in strengthening economic sustainability. The Latvian government and parliament must continue with reforms in 2019, particularly in the education and health sectors.

The 2018 financial sector overhaul affected credit institutions that mostly target foreign customers. Deposits and payments by foreign customers contracted even more significantly than before, with the those credit institutions cutting services to high-risk customers and reviewing their business models.

In response to the MONEYVAL report (August 2019), which identified gaps in AML/CFT, the government has also implemented a set of measures to achieve significant progress in the field of AML.