The Ministry of Economics has prepared the 2023 Latvian Economic Development Report, which provides a traditional assessment of the situation in the Latvian economy and forecasts future economic development prospects.
Last year, Latvia’s economic development continued to be affected by the geopolitical situation and global uncertainty, high prices, and rising loan interest rates. In the first three quarters of 2023, Latvia's gross domestic product (GDP) was 0.6% lower than a year earlier. A decrease in volume was observed in the manufacturing sectors, which was largely linked to the deterioration of export opportunities. Conversely, growth was seen in the construction sector, boosted by European Union (EU) fund investments, and in most service sectors. The external environment negatively impacted foreign trade last year – volumes of exports of goods and services in the first three quarters of 2023 were 5.8% lower than a year earlier. Very different development trends were observed across various sectors. A decrease in volume was observed last year in the manufacturing sectors, which was largely linked to the deterioration of export opportunities.
Inflation was primarily impacted by the rise in global energy and food prices. In December 2022, consumer prices in Latvia were 20.8% higher than a year earlier, and average annual inflation rose to 17.3%; in 2023, consumer prices stabilised, falling each month compared to the corresponding month of the previous year – from 21.5% at the beginning of 2023 to 1.0% in November; the average annual inflation in November was 10.6%. Going forward, the main influence on price changes will continue to be linked to global fluctuations in energy and food prices, and their secondary impact on the prices of industrial goods and services will also be observed.
The labour market situation did not deteriorate significantly in 2023, as the demand for labour remains high. The average monthly gross wage also continued to increase, but its growth rates were lower than the inflation rate, leading to a decline in purchasing power. In the second and third quarters of 2023, real wages began to rise again – last year, the real net wage growth, taking inflation into account, was 5.7%. Positive pressure on wages will continue to be maintained both by the process of wage convergence towards the levels of economically developed EU countries and by the growing shortage of qualified labour – a tightening labour market that forces entrepreneurs to think more actively not only about how to attract new specialists, but also about how to retain existing ones, including by reviewing remuneration rates.
We forecast that in 2024, given favourable external conditions and the implementation of ambitious measures to attract investment and boost exports, economic growth could accelerate, with GDP growth potentially reaching at least 2-3%.
“The goal of the government's economic policy is to achieve sustainable GDP growth by increasing productivity, investment, exports, and employment. To implement the government's economic goal, targeted state investments in the national economy are planned, which, together with EU fund and Recovery Fund investments, will make a significant contribution to the Latvian economy, thereby promoting the growth of Latvia's national economy and increasing export volumes. In total, 1.6 billion EUR is available for investment in the 2024 budget – the highest volume of funding in history. At the same time, this creates a responsibility to invest productively so as not to create additional pressure on inflation,” emphasises Minister for Economics Viktors Valainis.
The biggest risk to Latvia's growth this year will be linked to global economic development, especially the geopolitical situation; the further development of the EU common economic area will also be important. By basing the competitive advantages of the Latvian economy primarily on technological factors, improvements in production efficiency, and innovation, rather than to a lesser extent on cheap labour and low resource prices, Latvia's growth rates could potentially reach 4-5% per year in the medium term.
It is forecast that for Latvian exporters whose main sales market is EU countries, the situation will improve and external demand will increase – the volumes of exports of goods and services could increase by 1.9% in 2024. Meanwhile, import dynamics will be increasingly determined by the dynamics of Latvia's domestic demand; it is expected that in 2024, the volumes of imports of goods and services will increase by 2.4%.
In 2024, very different trends will remain in sectoral development. Similar to 2023, the fastest growth in 2024 is expected in the construction sector. The sector's development will be positively influenced by both EU fund investments and public procurement, as well as by the easing of inflation, which will have less of an impact on the cost of ongoing construction projects. It is predicted that the increase in construction volumes in 2024 could exceed 13%. It is expected that the manufacturing industry will return to positive growth rates in 2024, which will mainly be determined by the improvement of export opportunities. Difficulties will persist for individual companies linked to the Russian and CIS markets, and in this situation, they will need to continue searching for new supply chain opportunities and new export markets. Industry sectors oriented towards the domestic market will be influenced by the purchasing power of the population.