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Bank of Latvia expects Latvia's GDP to drop 6.5% this year

BC, Riga , 26.03.2020.Print version
The Bank of Latvia expects Latvia's gross domestic product to drop 6.5% this year, while average annual inflation is estimated at 0.5%, the central bank told LETA.

"Taking into account the current global economic developments, including the impact of the Covid-19 coronavirus, the Bank of Latvia projects Latvia's GDP to decline by 6.5% in 2020," the central bank said, pointing out that GDP growth projection for 2020 at the end of last year was 2.6%.


The Bank of Latvia emphasizes that the latest projections have been issued in circumstances of great uncertainty and could be significantly revised if the global fight against Covid-19 is not as successful as anticipated, which is an important precondition for economic growth to resume in the second half of the year.


According to the Bank of Latvia economists, the rapid spread of Covid-19 has caused a sizeable decline in the global market sentiment as well as significant business disruptions, which increase the likelihood of a global recession.


"The impact on the global economy will depend largely on the scale and duration of the coronavirus spread and the restrictions imposed to contain the virus, partly offset by major national fiscal policy initiatives, along with highly supportive monetary policy of the central bank," the Bank of Latvia said.


The central bank explains that international estimates of the impact of Covid-19 on the global and national economies differ, but they are becoming increasingly pessimistic. Estimates fluctuate over a very wide range, depending on experts' assumptions about how fast the coronavirus will be contained. The International Monetary Fund anticipates global growth this year to be negative, with a decline expected at least at the level of a global financial crisis. Market players' latest growth forecasts the eurozone range from minus 5% to minus 1.7%.


This may jeopardize companies' solvency. Support measures by the Latvian government are crucial to mitigate the effects of the crisis so short-term economic disruptions do not impair the national economy significantly, which would delay economic recovery once the spread of the coronavirus is stopped. At the same time, it is important to provide support for residents who are laid off, avoiding an escalation of social problems and a decline in domestic demand, says the central bank.


The Bank of Latvia also notes that the government's measures are a step in the right direction, but that they should be commensurate with the magnitude of the crisis, targeted at businesses and citizens hit the hardest by the crisis, and covering a broad range of industries for the duration of the crisis.


The central bank also mentions that the European Commission has suspended fiscal rules in order to enable governments to act flexibly to mitigate the negative effects of the crisis. Likewise, the European Union's state aid rules allow member states to provide financial support for companies quickly and efficiently.


"Latvia has been fiscally responsible compared to many other countries, and the public debt level is comparatively low, therefore the national economy can be provide the necessary support during the crisis. Moreover, the current situation is radically different from the 2008-2009 crisis, when the country had to cut spending. This time, thanks to fiscal discipline in recent years, as well as balanced economic development and the absence of macroeconomic imbalances, Latvia can borrow to support the economy," the Bank of Latvia emphasizes.


The central bank also points out that the macroeconomic projections are based on the assumption that the crisis will be overcome in the first half of the year and economic activity will resume quickly in the second half of the year.


"The state of emergency announced in Latvia and other countries and social distancing measures required to limit the spread of Covid-19 are already having a significant downward economic impact. The measures have a direct effect on several industries in Latvia," says the Bank of Latvia.


The Bank of Latvia also notes that the economic downturn projection of 6.5% for this year is based on the assumption that the coronavirus is relatively successfully contained, meaning that its impact on the economy will be short-lived.






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