Analytics, Economics, Financial Services, Latvia

During the first meeting of the Fiscal Discipline Council's GDP working group this year, its members noted that the presently visible unbalanced economy risks in the future might threaten economic growth and meeting of the requirements of the Fiscal Discipline Law.

Wages in the labor market have been growing steeper than productivity, and, if this trend persists, export competitiveness will deteriorate. At the same time, investment activity, even though it showed a weak rise in the middle of the last year, still is quite feeble.

Martins Kazaks, the head of the working group, said that even though we see a quite solid GDP growth at present, such development cannot be considered sustainable and sufficient.

"The main problem is comparatively low productivity growth that lags behind increase of wages. The current unemployment level – below 10% – is quite close to Latvia's natural unemployment level. It means that the pressure to increase wages will continue and is likely to even grow, especially in Riga, where the registered unemployment level in late 2015 had dropped to 5%," said Kazaks.

The council's member Morten Hansen said that Latvia's economic growth pace at present is comparatively good, but good economic development should not be taken for granted in the future.

"The current situation should be taken into account – the low investments level, the productivity growth that lags behind the wage growth, lack of structural reforms that threaten sustainable economic growth. The latest trends in global economy do not suggest soon improvement of the economic environment. All these factors make a negative impact on potential level of Latvia's GDP," he said.

The Fiscal Discipline Council is an independent collegial body established to monitor the compliance with the rules of the fiscal discipline. The council was established in January 2014.